Rev. Rul. 73-404

Advice has been requested whether the value of payments under a profit-sharing plan may be excluded from the decedent's gross estate pursuant to section 2039(c) of the Internal Revenue Code of 1954 under the circumstances described below.

The decedent was employed by a company that had established a trust forming part of a noncontributory profit-sharing plan meeting the requirements of section 401(a) of the Code. In the event of the employee's death prior to retirement, the plan provides for the amount credited to his account to be paid to the beneficiary designated by the participant. The decedent designated as beneficiary a testamentary trust to be established under his will.

In his will the decedent directed that the residue of his estate be held in trust. Among other powers enumerated in the provisions of the will establishing the trust, the testamentary trustee was given the authority, in his own discretion, to expend the corpus of the trust in satisfaction of the obligations of the decedent's estate. He was specifically prohibited in the will, however, from expending any payments he might receive under the profit-sharing plan for the benefit of the estate, and such prohibition was not invalid under state law applicable to the decedent's estate.

At the time of the decedent's death, he had sufficient assets, without taking into consideration his interest in the profit-sharing plan, to satisfy all the obligations of his estate.

Section 2039(c) of the Code provides that the value of any payment receivable by a beneficiary other than the executor is excludable from a decedent's gross estate if it is made from a trust forming part of a pension, stock bonus, or profit-sharing plan which meets the requirements of section 401(a), to the extent that the value of such payment is attributable to contributions by the decedent's employer. Section 20.2039-2(b) of the Estate Tax Regulations provides that such a payment is not considered to be receivable by a beneficiary other than the executor if it is receivable by or for the benefit of the decedent's estate.

The exclusion granted by section 2039(c) of the Code is available only when the distributions under a qualified plan are payable for the benefit of a beneficiary other than the employee's estate. In the present case, the terms of the decedent's will prohibit any use of the funds for the purpose of paying the estate's obligations.

Accordingly, the payments under the profit-sharing plan may be excluded from the decedent's gross estate pursuant to section 2039(c) of the Code since the payments are made to a trustee who, under the provisions of the will, does not have the power to satisfy the obligations of the estate out of those payments.

The same result would apply had the trustee of an inter vivos trust having the same powers and limitations been designated beneficiary under the profit-sharing plan. It would be immaterial whether the decedent reserved the power to revoke the trust or whether it was funded or unfunded.

The result would also be the same if state law had prohibited the use of the funds for the benefit of the estate.