3993 / Is the value of a death benefit payable from a qualified plan includable in the employee’s gross estate?

In general, yes, if the employee dies after 1984.

Estates of Decedents Dying After 1984

The present value (at the date of the decedent’s death or at an alternate valuation date) of an annuity or any other benefit payable to any surviving beneficiary under a qualified plan on the death of a participant, other than death proceeds of insurance on the participant’s life, is includable in the decedent’s estate.¹

The Tax Reform Act of 1984 generally repealed the estate tax exclusion discussed below for estates of decedents dying after 1984. The repeal does not apply to the estate of any decedent who was a plan participant in pay status on December 31, 1984, and who irrevocably elected the form of the benefit before July 18, 1984.² The Tax Reform Act of 1986 provided that these conditions are considered met if the decedent separated from service before January 1, 1985, and does not change the form of benefit before death.³ Qualified plan benefits rolled over to an IRA are treated as IRA benefits ( Q 3712) that are not eligible for the TRA ’86 separation from service rule.⁴ For the meaning of the term “in pay status” and the requirements of an irrevocable election of the form of benefit, see Temporary Treasury Regulation Section 20.2039-1T.

Life insurance proceeds are includable under IRC Section 2042, assuming the participant held an incident of ownership in the insurance at his or her death or the proceeds are payable to or for the participant’s estate. The right to name the beneficiary of the death proceeds is an incident of ownership ( Q 86).

Estates of Decedents Dying After 1982 and Before 1985

Up to $100,000 in value of an annuity or other benefit payable to any surviving beneficiary under a qualified plan on the death of a participant, to the extent such value is attributable to employer contributions and to deductible employee contributions, is excludable from the gross estate, although special rules apply to a lump sum distribution.⁵ The $100,000 limitation is an aggregate limitation applicable to survivor benefits payable under a qualified plan, a tax sheltered annuity ( Q 633), an individual retirement plan ( Q 3712), a Retired Serviceman’s Family Protection Plan, or a Survivor Benefit Plan.

The Tax Reform Act of 1984 amended TEFRA to provide that the $100,000 limit shall not apply to the estate of any decedent who was a plan participant in pay status on December 31, 1982, and who irrevocably elected the form of benefit before January 1, 1983.⁶ The Tax Reform Act of 1986 provided that these conditions are considered met if the decedent separated from service before January 1, 1983, and does not change the form of benefit before
death.⁷

Estates of Decedents Dying After 1953 and Before 1983

The value of an annuity or other benefit payable to any surviving beneficiary under a qualified plan on the death of a participant, to the extent such value is attributable to employer contributions and to deductible employee contributions, is excludable from the gross estate, although special rules apply to a lump sum distribution.⁸