623 / If an individual purchases a deferred or retirement annuity and dies before the contract matures, is the death value of the contract includable in his or her estate?

Generally, yes.

The amount payable on death before maturity is not life insurance and, therefore, the estate tax rules for annuities apply.

If a death benefit is payable to an annuitant’s estate, its value is includable in the gross estate under IRC Section 2033, and it is considered to be a property interest owned by the annuitant at the time of death.

If a death benefit is payable to a named beneficiary and an annuitant purchased the contract after March 3, 1931, the value of the death benefit generally is includable in the gross estate under IRC Section 2039, whether or not the right was reserved to change the beneficiary. If the individual purchased the annuity as a gift for another person, and retained no interest in the annuity payments, incidents of ownership, or refunds, the value of the annuity ordinarily will not be includable in the individual’s gross estate ( Q 628).

The same rules apply to the proceeds of a retirement income endowment if the insured dies after the terminal reserve value equals or exceeds the face value.¹

For example, an employer purchases a contract from an insurance company to provide an employee, upon retirement at age 65, with an annuity of $100 per month for life, and continues to pay a similar annuity to his beneficiary upon the employee’s death after retirement. The contract provides that if the employee dies before reaching retirement age, a lump sum payment of $20,000 will be paid to his beneficiary instead of the annuity. Assume that the reserve value of the contract at the retirement age is $20,000. If the employee dies after reaching retirement age, the death benefit to the beneficiary would be an annuity, which would be includable in the employee’s gross estate under Section 2039 (a) and (b). If, on the other hand, the employee dies before reaching his retirement age, the death benefit to the beneficiary would be insurance under a policy on the life of the decedent since the reserve value would be less than the death benefit.²