Annuities – I.R.C. §2039

Internal Revenue Code §72 governs the income taxation of annuity contracts. This post deals with the estate taxation of annuities.

Internal Revenue Code §2039 deals with traditional annuity contracts as well as other types of contractual arrangements under which a decedent was entitled to receive a periodic payment, effectively for life, and upon decedent’s death another party (the beneficiary) becomes entitled to continued periodic payments, or a lump sum payment.

In the case of a straight life annuity contract in which all payments terminate upon the annuitant’s death, nothing is includable in the gross estate since the contract is effectively terminated and has no value as of the date of death. Payments that continue to a survivor after the death of the primary annuitant (continued period payments under a “period certain” contract, or a lump sum (“refund”) payment) are includable in the gross estate of the decedent. Under an annuity providing for post-death payment(s) to the annuitant’s estate (rather than to a beneficiary), the value receivable would be treated as property owned by decedent, includable in the gross estate under §2033.

The contractual right of a beneficiary to receive a “survivor” benefit represents property of value effectively passing from the decedent, and thus, its value must be included in the decedent’s gross estate. For example, if under an employer’s non-qualified deferred compensation plan, periodic payments to an employee are to be continued to be made to a surviving beneficiary after the employee’s death, the value of the survivor’s benefit would be includable in the gross estate. In general, the value of such survivor benefits is includable in the decedent’s gross estate to the extent that they are attributable to contributions made by the decedent or his employer. In other words, if the annuity contract had been purchased by the decedent (or his employer, or through contributions by each), then the value of the survivor annuity or refund is includable in the gross estate. If the decedent (and/or his employer) contributed less than 100 percent of the cost of the contract, then the gross estate will include only the portion of the survivor benefits equal to the portion of the cost of the contract so contributed.

If the decedent dies prematurely, before the annuity starting date, and the contract provides for a lump sum death benefit (refund) in such event, the rules of §2033 or §2039 will also apply. If the benefit is payable to the decedent’s estate it will be includable in the gross estate under §2033; if it is payable to a beneficiary it will be includable in the gross estate in the same proportion that the decedent or his employer contributed to the cost of the contract under §2039.

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In addition to the property owned outright at the date of death the gross estate for federal estate tax purposes includes certain other property with which the decedent was connected, as discussed in the following blog posts:

Property Transferred With Retained Life Estate – I.R.C. §2036

Transfers Taking Effect at Death – I.R.C. §2037

Revocable Transfers – I.R.C. §2038

Annuities – I.R.C. §2039

Jointly Owned Property – I.R.C. §2040

Property Subject to General Power of Appointment – I.R.C. §2041

Proceeds of Life Insurance – I.R.C. §2042

Gifts Made Within Three Years of Death – I.R.C. §2035