Rev. Rul. 78-282

Advice has been requested as to the proper method to be used in determining the amount includible in the gross estate under section 2039 of the Internal Revenue Code of 1954, under the circumstances described below.

The decedent, A, retired from employment with X Corporation on January 1, 1975, at age 65. Upon retirement, A became entitled to receive a retirement annuity of $250 per month from X Corporation's contributory pension plan, a plan which meets the requirements of section 401(a) of the Code. A's contributions to the pension plan, plus accrued interest, totaled $10,000.

In addition to the decedent's retirement benefit, the plan provided that A's wife, B, who was aged 62 on the date of A's retirement, was entitled to receive a survivor's benefit on the death of A. Under the terms of the plan, B, upon the death of A, could elect to receive an annuity of $150 per month payable for B's life, or an annuity of $200 per month payable until death or remarriage. Upon A's death in January 1977, B elected to receive the latter benefit. B was aged 64 at A's death.

The question presented is what values are to be utilized in applying the formula contained in section 20.2039-2(c)(2) of the Estate Tax Regulations where the decedent's spouse has a choice of available survivor benefits.

Section 2039(a) of the Code provides for inclusion in the gross estate of the value of an annuity or other payment receivable by any beneficiary by reason of surviving the decedent under any form of contract or agreement if, under the contract or agreement, a lifetime annuity was payable to the decedent. However, pursuant to section 2039(c), amounts payable (other than lump sum distributions described in section 402(e)(4)) under a plan meeting the requirements of section 401(a) of the Code are excludable to the extent that the amounts payable are attributable to contributions made by the employer to the plan. Thus, in this case, the amount to be included is the amount which bears the same ratio to the value of the beneficiary's annuity at the decedent's death as the employee's contributions to the plan bear to the total contributions to the plan on the employee's account.

In a situation where the employer's contributions to the plan, and thus, the total contributions to the plan, cannot be readily ascertained, section 20.2039-2(c)(2) of the regulations provides that the total amount of the contributions to the plan on the employee's account is deemed to be the value of the annuity or other payment payable to the decedent and to his survivor, as of the time the decedent's rights first mature. Consequently, if the employer's contributions to the plan cannot be ascertained, the following formula may be utilized in determining the amount includible.

Decedent's contribution Value of to the retirement system survivor's + accrued interest benefit on ------------------------- X decedent's Value of benefit payable date of to the retiree + value of death survivor's benefit, as of the date of retirement

In the instant case, the values of the survivor's benefit to be utilized in the multiplicand and the denominator of the multiplier of the formula are not readily apparent, because the survivor could elect between two available annuities.

As noted above, the value of the denominator of the multiplier is intended to represent the total contributions to the plan on the employee's account. In order for the denominator to properly represent this total contribution, it must be based on the maximum benefits available to the decedent and the survivor as of the date of retirement and it must be calculated pursuant to section 20.2031-10 of the regulations. Consequently, the available survivor's benefit that is determined to have the highest present value, as of the date of retirement, is to be utilized in computing the value of the denominator.

In the instant case, the present value of the available survivor's benefits, as of the date of retirement, may be computed as follows:

1. Annuity for life of a female, aged 62, payable for such time as she survives a male, aged 65 (based on section 20.2031-10 of the regulations and example 4, Publication 723 A, Factors at 6 percent Involving One and Two Lives). Monthly payment X 12 X Applicable factor X Factor for monthly payments = Present value of annuity $150 X 12 X 3.1595 X 1.0272 = $5,841.79

2. Annuity for life of a woman, aged 62, payable for such time as she survives her husband, aged 65, and does not remarry (based on Life Table LN, the American Remarriage Table, and interest at 6 percent). $200 X 12 X 3.0962 X 1.0272 = $7,633.00

Since the life annuity contingent on remarriage was the maximum available benefit as of the date of retirement, this value is used in computing the denominator of the multiplier.

The multiplicand of the formula represents the amount that would be includible under section 2039(a) but for the exclusion provisions of section 2039(c). Therefore, the present value of the annuity used in this portion of the formula must reflect the maximum benefit the survivor was entitled to receive under the plan. See Reinecke v. Northern Trust Co., 278 U.S. 339 (1928). Consequently, the survivor's benefit to be utilized in this portion of the formula is based on the annuity option that has the maximum present value on the decedent's date of death, regardless of the annuity option actually selected by the beneficiary. In the instant case, the present value of the available survivor's benefits, as of the date of death, may be computed as follows:

1. Annuity for life of a female, aged 64 (based on Table A(2) contained in section 20.2031-10 of the regulations). $150 X 12 X 9.5592 X 1.0272 = $17,674.58

2. Annuity for life of a woman, aged 64, just widowed, contingent on remarriage (based on Life Table LN, American Remarriage Table, and interest at 6 percent). $200 X 12 X 9.2932 X 1.0272 = $22,910.34

Since the life annuity contingent on remarriage has the maximum present value, this value is utilized in the formula, regardless of whether the survivor elected to receive the other benefit.

Accordingly, if the beneficiary has the right to select among several survivor's annuities, the value of the survivor's benefit is based on the annuity option that has the highest present value on the applicable valuation dates, for purposes of applying the formula contained in section 20.2039-2(c)(2) of the regulations. The method to determine the amount includible in A's gross estate may be illustrated as follows:

1. Present value of decedent's annuity at retirement (using Table A(1) contained in section 20.2031-10 of the regulations). $250 X 12 X 8.0353 X 1.0272 = $24,761.58

2. Present value of survivor's annuity at decedent's retirement (maximum value). $200 X 12 X 3.0962 X 1.0272 = $ 7,633.00

3. Present value of both annuities at retirement. = $32,394.58

4. Value of survivor's annuity at decedent's death (maximum value). $200 X 12 X 9.2932 X 1.0272 = $22,910.34

5. Decedent's contributions to the retirement system. = $10,000

6. Amount includible in decedent's gross estate. $10,000 / $32,394.58 X $22,910.34 = $ 7,072.28