Rev. Rul. 54-398

Further consideration has been given to the requirement, set forth in Part 2(c) of Revenue Ruling 33, C. B. 1953-1, 267, that a trust, which forms a part of a stock bonus, pension, or profit-sharing plan of an employer, must grant employee participants the right to designate their own beneficiaries, in order to qualify as exempt under section 165(a) of the Internal Revenue Code of 1939.

Section 165(a) of the Code requires that an employer's plan must be for the "exclusive benefit of his employees or their beneficiaries."

Section 39.165-1(a)(5) of Regulations 118 provides, in part, that the term "beneficiaries" of an employee includes the estate of the employee, dependents of the employee, persons who are the natural objects of the employee's bounty, and any person designated by the employee to share in the benefits of the plan after the death of the employee.

The above definition of the term "beneficiaries" is not to be construed to mean that absolute freedom of designation to the employees is intended in every case; otherwise it would have been unnecessary to enumerate the classes of beneficiaries in the regulations, since the phrase as used therein, "any persons designated by the employee," would have been sufficient in itself to accomplish that purpose.

Therefore, although the employees are not granted the unrestricted right to designate their own beneficiaries, a plan may qualify under section 165(a) of the Code if a provision is made naming as beneficiaries the estate of the employee, dependents of the employee, or persons who are the natural objects of the employee's bounty.

Accordingly, Revenue Ruling 33, C. B. 1953-1, 267, Part 2(c), is modified to the extent inconsistent herewith, and P. S. 19 dated August 29, 1944, is revoked.