Rev. Rul. 70-211

Advice has been requested relative to the treatment, for Federal estate tax purposes, of a death benefit received under the circumstances described below.

At the time of his death the decedent was a participant in a company's Employees Retirement Plan that qualified under section 401(a) of the Internal Revenue Code of 1954. In addition to the normal retirement benefits, the plan provided preretirement death benefits in the form of life insurance on each participant's life. The insurance was purchased by the trustees of the plan with contributions of the company. The terms of the plan also permitted voluntary employee contributions that could be used upon request of the contributing employee to purchase additional life insurance annually through a supplemental agreement with the insurance company. The trustees owned the policies, but the employee had the right at all times to change the designated beneficiary.

Upon the decedent's death prior to retirement, a death benefit was paid to his wife, the named beneficiary. The amount paid was attributable to both the company's contribution and the voluntary contributions of the decedent.

The question presented here is whether any amount of the proceeds of insurance falls within the scope of the exclusion provisions of section 2039(c) of the Code or is includible in the decedent's gross estate under section 2042 of the Code.

Section 2042 of the Code provides for the inclusion in the gross estate of all amounts receivable as insurance under policies on the life of the decedent with respect to which the decedent possessed incidents of ownership at the time of his death. Section 20.2042-1(c)(2) of the Estate Tax Regulations expressly provides, that a right to change the beneficiary of an insurance policy is an incident of ownership under the policy.

Section 2039(c) of the Code provides that, notwithstanding any other provision of law, the value of an annuity or other payment receivable by any beneficiary of a decedent under an employees' trust forming part of a pension, stock bonus or profit-sharing plan which, at the time of the decedent's separation from employment (whether by death or otherwise), or at the time of the termination of the plan, if earlier, met the requirements of section 401(a) of the Code, shall be excluded from the gross estate, to the extent that the value of the annuity or other payment is attributable to contributions made by the decedent's employer under such plan, since such contributions are not considered to be made by the employee.

The payment of proceeds of an insurance policy on the life of an employee where the policy was purchased pursuant to the terms of qualified plan is a "payment" within the meaning of section 2039(c) of the Code. If any portion of the payment falls within the provisions of section 2039(c) of the Code, this section is controlling with respect to such amount notwithstanding that section 2042 of the Code would otherwise apply to such proceeds of insurance. Rev. Rul. 67-371, C.B. 1967-2, 329.

Since the exclusion provided by section 2039(c) of the Code applies only to that portion of the life insurance benefits purchased under the qualified plan with the contributions of the employer, it is held that only the death benefits attributable to the contributions of the company are excludable under that section of the Code. The portion of the benefits paid to the beneficiary that is attributable to the decedent's contributions is not excludable under section 2039(c) of the Code, but is includible in his gross estate under section 2042 of the Code.