101 / Is the value of a survivor benefit payable by an employer under a nonqualified salary continuation or deferred compensation agreement includable in the employee’s gross estate?

Yes, it is includable under IRC Section 2039(a) if (1) it is provided for “under any form of contract or agreement,” and (2) the decedent had a right to receive the payments for life, for any period not ascertainable without reference to the decedent’s death, or for any period that does not in fact end before the decedent’s death.

The statute applies where the decedent was receiving payments and had a nonforfeitable right to future payments at the time of death. Regulations make it equally clear, however, that the IRS will consider the statute applicable whether the decedent had a right to present or future payments at the time of death and whether the rights were forfeitable or nonforfeitable.

The regulations provide: “The term ‘contract or agreement’ includes any arrangement, understanding or plan, or any combination of arrangements, understandings or plans arising by reason of the decedent’s employment.”¹ Although the Tax Court has stated that an enforceable contract is a prerequisite to the application of IRC Section 2039,² later case law has led to a less rigid rule. When there is no legally enforceable contract, other circumstances may exist that would cause an annuity to be considered as having been paid under a contract or agreement for purposes of the statute. Thus, if the survivor annuitant has a controlling interest in the company, if consideration for the annuity is found, or if the company has in the past consistently paid annuities pursuant to an unenforceable plan, the annuity may be considered as having been paid under a contract or agreement; if no such circumstances are found, a legally enforceable contract must exist.³

It has been argued that payments under a deferred compensation contract have no estate tax value if they were forfeitable to the executive during his or her lifetime. This argument is based on the theory that the estate tax value is to be determined as of the moment prior to death. However, it is now rather firmly established that the value is to be determined as of the moment after death when the contingencies have ceased to have an operative effect.⁴ In Silberman v. United States,⁵ the commuted value of the widow’s benefit was includable in the employee’s estate even though the employee had to render consulting services to get retirement benefits.

The estate tax cannot be avoided by providing for the retirement pay and death benefit under separate contracts; IRS regulations interpret the statutory term “contract or agreement” to include “any combination of arrangements, understandings or plans arising by reason of the decedent’s employment.”⁶

The death benefit is includable in the gross estate whether it is payable in a lump sum or in periodic payments, and whether it is forfeitable or nonforfeitable to the survivor. Forfeitability will be taken into account in connection with the valuation of the benefit in the employee’s estate.⁷ For example, where the employer has a right to recover remaining unpaid benefits upon the death or remarriage of the employee’s surviving spouse, the value of the death benefit in the employee’s estate will not include the value of this refund feature.⁸ (Such a forfeiture provision, however, would make the benefit ineligible for the marital deduction.) When the death benefit is payable as an annuity, the commuted value of the payments is the proper estate tax value.⁹ The commuted value of annuity payments is determined by use of the Estate and Gift Tax Valuation Tables.

Thus, a widow’s benefit under a typical deferred compensation agreement is includable in the gross estate by reason of IRC Section 2039(a). Even if it were not includable under IRC Section 2039(a), however, it probably would be includable under one of the other estate tax sections.¹⁰