634 / Is a death or survivor benefit under a tax sheltered annuity includable in an employee's gross estate if the decedent died after 1953 and before 1985?

If an employer is one of the eligible types, an estate tax exclusion is available provided the benefit is payable to some beneficiary other than an employee’s estate. The exclusion applies only to amounts attributable to employer contributions, that is, to premiums that were excludable from the employee’s gross income under the exclusion allowance rule ( Q 4037) and to deductible employee contributions.

Any portion of premiums that were not excludable from an employee’s gross income or were not deductible employee contributions are treated as employee contributions and a corresponding portion of the value of the death or survivor benefit is includable in the employee’s gross estate.⁴ For this purpose, any one- year term costs of pure life protection that were includable in the employee’s gross income are treated as employee contributions.⁵ The estate tax exclusion appears applicable whether payments are made in a single sum or in several payments. If a benefit is payable to an employee’s estate, the entire value is includable in the employee’s gross estate even though all premiums have come within the exclusion allowance.⁶

With respect to the estate of a decedent dying after 1982 and before 1985, the aggregate estate tax exclusion applicable to survivor benefits payable under a qualified plan ( Q 3733 to Q 3817), a tax sheltered annuity, or an individual retirement plan ( Q 3641) cannot exceed $100,000.⁷ TRA ’84 also amended TEFRA to provide that the $100,000 limit shall not apply to the estate of any decedent who was a plan participant on pay status on December 31, 1982, and who irrevocably elected the form of benefit before January 1, 1983.⁸ The Tax Reform Act of 1986 provided that these conditions are considered met if the decedent separated from service before January 1, 1983, and does not change the form of benefit before death.⁹ For estates of decedents dying before 1983, the exclusion (as described) is unlimited.

The estate tax exclusion applies to the value of a death benefit receivable under a retirement annuity contract. Payments to a retirement fund by a REC organization will be regarded as the purchase of a retirement annuity contract for the organization’s employee if the payments are made pursuant to a contractual arrangement between the organization and the custodian of the fund whereby the custodian of the fund is obligated to provide an annuity to the employee. Thus, if a state university makes payments under this kind of arrangement to a state retirement system on behalf of a professor employed by the university, the value of survivor benefits payable from the system following the professor’s death is eligible for the estate tax exclusion in the professor’s estate.¹⁰

Although it is clear that a tax-sheltered annuity may provide incidental life insurance protection ( Q 4029), it is not entirely clear what the estate tax results will be where the death benefit consists of life insurance proceeds payable by reason of the insured’s death prior to the maturity of the contract. A technical advice memorandum indicates that the term costs of life insurance protection, unlike the results under a qualified pension plan, will be treated as nondeductible employee contributions for estate tax purposes.¹¹

The estate tax exclusion under IRC Section 2039(c) is applicable only to the estate of a decedent who was the employee and not to the estate of a non-employee beneficiary.¹² See Q 3712 for the estate tax exclusion applicable to amounts rolled over from a tax-sheltered annuity to an IRA.