Rev. Rul. 77-157

Advice has been requested whether any amount is excluded from the gross estate of a decedent under section 2039(c) of the Internal Revenue Code of 1954, in the circumstances described below.

The decedent was a lifelong resident of State X and, at death, was employed by a corporation that provided its employees with a "qualified" profit-sharing plan that met the requirements of section 401(a) of the Code. The employer corporation made all contributions to the profit-sharing plan. Under the terms of the plan, each employee could designate a beneficiary to whom the amount held to the employee's credit would be paid in the event of the employee's death before retirement. The decedent designated a trust company as the beneficiary of the benefits under the plan. The distribution of the decedent's benefits did not constitute a lump sum distribution described in section 402(e).

The decedent's will provided for the residue of the estate to be held by the above-mentioned trust company as trustee of a trust set forth in the will. Under the terms of the trust, the trust company is to manage the assets for the benefit of the decedent's children. The trustee is empowered, as designated beneficiary, to receive the payments under the profit-sharing plan. The trustee is also empowered, but not required, to use trust funds to assist the decedent's estate, if necessary, in the payment of the obligations of the estate, in the sole and absolute discretion of the trustee.

The assets of the decedent's probate estate were fully capable of satisfying the obligations of the estate in a timely fashion without need for a request to the residuary trustee to make available any of the profit-sharing plan funds. Therefore, all obligations were paid without resort to the profit-sharing funds.

The law of State X permits an employee to make a valid designation of a testamentary trustee as the beneficiary of payments under a profit-sharing plan. State X has also enacted the following statute with respect to insurance proceeds and various types of employee benefit arrangements, including profit-sharing plans:

Except as otherwise provided in the designator's will, the rights and benefits and their proceeds paid or transferred to the trustee shall not be subject to the debts of the designator to any greater extent than if they were paid or transferred to a named beneficiary, payee, or owner other than the estate of the designator.

The question presented is whether, in view of the law of State X and the trust provisions in the decedent's will, the profit-sharing plan payments are payable to or for the benefit of the decedent's estate so that no exclusion from the decedent's gross estate is allowable under section 2039(c) of the Code.

Section 2039(a) of the Code provides that the gross estate shall include the value of an annuity or other payment receivable by a beneficiary by reason of surviving the decedent under a contract or agreement, if an annuity or other payment was payable to the decedent under the contract or if the decedent possessed the right to receive such an annuity or other payment for life.

Subsection (c) of section 2039 of the Code, as amended by the Tax Reform Act of 1976, provides in relevant part as follows:

EXEMPTION OF ANNUITIES UNDER CERTAIN TRUSTS AND PLANS.--Notwithstanding the provisions of this section or of any provision of law, there shall be excluded from the gross estate the value of an annuity or other payment (other than a lump sum distribution * * *) receivable by any beneficiary (other than the executor) under--

(1) an employees' trust (or under a contract purchased by 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 termination of the plan if earlier, met the requirements of section 401(a);

* * * * *

If such amounts payable after the death of the decedent under a plan described in paragraph (1) * * * are attributable to any extent to payments or contributions made by the decedent, no exclusion shall be allowed for that part of the value of such amounts in the proportion that the total payments or contributions made by the decedent bears to the total payments or contributions made. * * *

Section 20.2039-2(b) of the Estate Tax Regulations provides, in part, as follows:

Plans and annuity contracts to which section 2039(c) applies. Section 2039(c) excludes from a decedent's gross estate, to the extent provided in paragraph (c) of this section, the value of an annuity or other payment receivable by any beneficiary (except the value of an annuity or other payment receivable by or for the benefit of the decedent's estate) under--

(1) An employees' trust (or under a contract purchased by 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 earlier termination of the plan, met the requirements of section 401(a); * * *

For the meaning of the term "annuity or other payment", see paragraph (b) of section 20.2039-1. For the meaning of the phrase "receivable by or for the benefit of the decedent's estate", see paragraph (b) of section 20.2042-1. * * *

Section 20.2042-1(b) of the regulations sets forth the following description of the term "receivable by or for the benefit of the estate":

Receivable by or for the benefit of the estate. (1) Section 2042 requires the inclusion in the gross estate of the proceeds of insurance on the decedent's life receivable by the executor or administrator, or payable to the decedent's estate. It makes no difference whether or not the estate is specifically named as the beneficiary under the terms of the policy. Thus, if under the terms of the insurance policy the proceeds are receivable by another beneficiary but are subject to an obligation, legally binding upon the other beneficiary, to pay taxes, debts, or other charges enforceable against the estate, then the amount of such proceeds required for the payment in full (to the extent of the beneficiary's obligation) of such taxes, debts, or other charges is includible in the gross estate. * * *

Rev. Rul. 73-404, 1973-2 C.B. 319, deals with payments made under a "qualified" profit-sharing plan to a testamentary trust designated by a decedent. The trustee was prohibited, under the terms of the will, from using any of the payments from the plan for the benefit of the estate. The Revenue Ruling concludes that in view of the prohibition, the exclusion under section 2039(c) of the Code was applicable.

Under section 20.2042-1(b) of the regulations (quoted above), insurance proceeds are considered payable to or for the benefit of the decedent's estate to the extent that an individual beneficiary is subject to a legally binding obligation to pay taxes, debts, or other charges against the estate. Where, on the other hand, the beneficiary is not subject to a legally binding obligation to make such payments, but may voluntarily do so, the power to so volunteer does not require inclusion, in the decedent's gross estate, of the proceeds payable to the beneficiary. Under section 20.2039-2(b) of the regulations (quoted above), the rules set forth in section 20.2042-1(b) with respect to insurance proceeds are equally applicable to payments under a "qualified plan" to a beneficiary other than the estate of the decedent. Therefore, unless the beneficiary is subject to a binding obligation to assist in the satisfaction of the obligations of the estate, funds received by the beneficiary from a "qualified plan" are not considered to be receivable by or for the benefit of the estate.

The circumstances of the present case involve a trustee-beneficiary that is empowered to use payments from the plan to assist in paying the estate's obligations and is not prohibited from doing so. Therefore, Rev. Rul. 73-404 is not directly applicable since it involves a trustee who was specifically prohibited from assisting the estate. Although the trustee in the present case may, in its discretion, assist the estate, the above-quoted statute of State X relieves the trustee from any binding obligation to do so. As a result, under the applicable rules with respect to insurance proceeds and annuities, discussed above, the payments to the trustee from the decedent's profit-sharing plan are not payments "receivable by or for the benefit of the decedent's estate."

Accordingly, in the present case, the entire value of the payments received by the testamentary trustee designated by the decedent is excluded under section 2039(c) of the Code from the gross estate of the decedent since those payments are receivable under a "qualified plan" that met the requirements of section 401(a) and to which all contributions were made by the decedent's employer.