Rev. Rul. 70-514

Advice has been requested relative to the Federal gift tax consequences when a Federal employee accepts a reduced retirement annuity so as to provide a survivor annuity for his wife.

A Federal employee, upon retirement under the United States Civil Service Retirement System, elected to receive a reduced annuity of $545 per month and thereby provide an annuity of $320 per month payable to his wife for such time as she survives him. The employee's contributions, including interest thereon, to the plan were $10,000. On the date of retirement, the value of his annuity was $88,000, and the value of his wife's survivor annuity was $12,000, or a total value of $100,000. The election to receive a reduced annuity became irrevocable when the Civil Service Commission approved his annuity claim.

The United States Civil Service Retirement System is treated as an employees' trust which has been held to meet the requirements of section 401(a) of the Internal Revenue Code of 1954.

Section 2517 of the Code provides that the exercise by an employee of an election under a plan qualified under section 401(a) of the Code whereby an annuity will become payable to any beneficiary after his death results in a gift being made in an amount which bears the same proportion to the value of the survivor annuity as the contributions to the retirement fund by the electing employee bear to the total of all the contributions made to the fund on the employee's behalf.

Where an employee has an unqualified right to an annuity but takes a lesser annuity with the provision that upon his death a survivor annuity will be paid to a designated beneficiary, the gift is made at the time the election and designation become irrevocable. See section 25.2517-1(a) of the Gift Tax Regulations.

Section 25.2517-1(c)(2) of the regulations provides that if the employer's contributions to the plan on the employee's account (and thus the total contributions to the plan on the employee's account) cannot be readily ascertained, the total contributions may, in the absence of a more precise method of determination, be considered to be the value of the annuities payable to the employee and the beneficiary computed in accordance with the rules set forth in section 25.2512-5 of the regulations.

The amount contributed by the Government to the annuities of the employee and his beneficiary is not readily ascertainable. Thus, the total value of both annuities is considered to be the total contributions. The amount of the gift is computed as follows:

      Employee's

A gift of such survivor annuity is a gift of a future interest in property against which no part of the $3,000 annual exclusion provided by section 2503(b) of the Code is allowable.

Notwithstanding the fact that a gift tax return is required to be filed, no gift tax liability need be incurred unless the lifetime specific exemption of $30,000 has been exhausted. The full exemption may be taken in a single year, or may be utilized over a period of years in such amounts as the donor sees fit. Section 25.2521-1 of the regulations.