§ 20.2039-5 Annuities under individual retirement plans. ( a ) *Section 2039(e) exclusion* — ( 1 ) *In general.* In the case of a decedent dying after December 31, 1976, section 2039 (e) excludes from the decedent's gross estate, to the extent provided in paragraph (c) of this section, the value of a “qualifying annuity” receivable by a beneficiary under an individual retirement plan. The term “individual retirement plan” means— ( i ) An individual retirement account described in section 408(a).
( ii ) An individual retirement annuity described in section 408(b), or
( iii ) A retirement bond described in section 409(a).
( 2 ) *Limitations.* ( i ) Section 2039(e) applies only with respect to the gross estate of a decedent on whose behalf the individual retirement plan was established. Accordingly, section 2039(e) does not apply with respect to the estate of a decedent who was only a beneficiary under the plan.
( ii ) Section 2039(e) does not apply to an annuity receivable by or for the benefit of the decedent's estate. For the meaning of the term “receivable by or for the benefit of the decedent's estate,” see § 20.2042-1(b).
( b ) *Qualifying annuity.* For purposes of this section, the term “qualifying annuity” means an annuity contract or other arrangement providing for a series of substantially equal periodic payments to be made to a beneficiary for the beneficiary's life or over a period ending at least 36 months after the decedent's death. The term “annuity contract” includes an annuity purchased for a beneficiary and distributed to the beneficiary, if under section 408 the contract is not included in the gross income of the beneficiary upon distribution. The term “other arrangement” includes any arrangement arising by reason of the decedent's participation in the program providing the individual retirement plan. Payments shall be considered “periodic” if under the arrangement or contract (including a distributed contract) payments are to be made to the beneficiary at regular intervals. If the contract or arrangement provides optional payment provisions, not all of which provide for periodic payments, payments shall be considered periodic only if an option providing periodic payments is elected not later than the date the estate tax return is filed (as determined under § 20.2039-3(d)). For this purpose, the right to surrender a contract (including a distributed contract) for a cash surrender value will not be considered an optional payment provision. Payments shall be considered “substantially equal” even though the amounts receivable by the beneficiary may vary. Payments shall not be considered substantially equal, however, if more than 40% of the total amount payable to the beneficiary under the individual retirement plan, determined as of the date of the decedent's death and excluding any postmortem increase, is payable to the beneficary in any 12-month period.
( c ) *Amount excludible from gross estate* — ( 1 ) *In general.* Except as otherwise described in this paragraph (c), the amount excluded from the decedent's gross estate under section 2039 (e) is the entire value of the qualifying annuity (as determined under §§ 20.2031-1 and 20.2031-7 or, for certain prior periods, § 20.2031-7A) payable under the individual retirement plan.
( 2 ) *Excess contribution.* In any case in which there exists, on the date of the decedent's death, an excess contribution (as defined in section 4973(b)) with respect to the individual retirement plan, the amount excluded from the value of the decedent's gross estate is determined under the following formula: E = A − A(X ÷ C − R) Where: E = The amount excluded from the decedent's gross estate under section 2039(e), A = The value of the qualifying annuity at the decedent's death (as determined under §§ 20.2031-1 and 20.2031-7 or, for certain prior periods, § 20.2031-7A), X = The amount which is an excess contribution at the decedent's death (as determined under section 4973(b)), C = The total amount contributed by or on behalf of the decedent to the individual retirement plan, and R = The total of amounts paid or distributed from the individual retirement plan before the death of the decedent which were either includable in the gross income of the recipient under section 408(d)(1) and represented the payment or distribution of an excess contribution, or were payments or distributions described in section 408(d)(4) or (5) (relating to returned excess contributions).
( 3 ) *Certain section 403(b)(8) rollover contributions.* This subparagraph (3) applies if the decedent made a rollover contribution to the individual retirement plan under section 403(b)(8), and the contribution was attributable to a distribution under an annuity contract other than an annuity contract described in § 20.2039-2(b)(3). If such a rollover contribution was the only contribution made to the plan, no part of the value of the qualifying annuity payable under the plan is excluded from the decedent's gross estate under section 2039(e). If a contribution other than such a rollover contribution was made to the plan, the amount excluded from the decedent's gross estate is determined under the formula described in subparagraph (2) of this paragraph, except that for purposes of that formula, X includes the amount that was a rollover contribution under section 403(b)(8) attributable to a distribution under an annuity contract not described in § 20.2039-2(b)(3).
( 4 ) *Surviving spouse's rollover contribution.* This subparagraph (4) applies if the decedent made a rollover contribution to the individual retirement plan under section 402(a)(7), relating to rollovers by a surviving spouse. If the rollover contribution under section 402(a)(7) was the only contribution made by the decedent to the plan, no part of the value of the qualifying annuity payable under the plan is excluded from the decedent's gross estate under section 2039(e). If a contribution other than a rollover contribution under section 402(a)(7) was made by the decedent to the plan, the amount excluded from the decedent's gross estate is determined under the formula described in subparagraph (2) of this paragraph, except that for purposes of that formula, X includes the amount that was a rollover contribution under section 402(a)(7).
( 5 ) *Election under § 1.408-2(b)(7)(ii) .* This subparagraph (5) applies if the decedent at any time made the election described in § 1.408-2(b)(7)(ii) with respect to an amount in the individual retirement plan. If this subparagraph (5) applies, the amount excluded from the decedent's gross estate is determined under the formula described in subparagraph (2), except that for purposes of that formula, X and C include the amount with respect to which the election was made.
( 6 ) *Plan-to-plan rollovers.* ( i ) This subparagraph (6) applies if the individual retirement plan is a transferee plan. A “transferee plan” is a plan that was the recipient of a contribution described in section 408(d)(3)(A)(i) or 409(b)(3)(C) (relating to rollovers from one individual retirement plan to another) made by the decedent. The amount of the contribution described in section 408(d)(3)(A)(i) or 409(b)(3)(C) is the “rollover amount.” The plan from which the rollover amount was paid or distributed to the decedent is the “transferor plan.”
( ii ) If the decedent made a contribution described in subparagraph (3) or (4) to the transferor plan, the amount excluded from the decedent's gross estate with respect to the transferee plan is determined under the formula described in subparagraph (2), except that for purposes of that formula, X includes so much of the rollover amount as was attributable to the contribution to the transferor plan that was described in subparagraph (3) or (4). The extent to which a rollover amount is attributable to a contribution described in subparagraph (3) or (4) that was made to the transferor plan is determined by multiplying the rollover amount by a fraction, the numerator of which is the amount of such contribution, and the denominator of which is the sum of all amounts contributed by the decedent to the transferor plan (if not returned as described under R in subparagraph (2)), and any amount in the transferor plan to which the election described in subparagraph (5) applied.
( iii ) If the decedent made the election described in subparagraph (5) with respect to an amount in the transferor plan, the amount excluded from the decedent's gross estate with respect to the transferee plan is determined under the formula described in subparagraph (2), except that for purposes of that formula, X includes so much of the rollover amount as was attributable to the amount in the transferor plan to which the election applied. The extent to which a rollover amount is attributable to an amount in the transferor plan to which the election applied is determined by multiplying the rollover amount by a fraction, the numerator of which is the amount to which the election applied, and the denominator of which is the sum of all amounts contributed by the decedent to the transferor plan (if not returned as described under R in subparagraph (2)), and the amount in the transferor plan to which the election applied.
( iv ) If a transferor plan described in this subparagraph (6) was also a transferee plan, then the rules described in this subparagraph (6) are to be applied with respect to both the rollover amount paid to the plan and the rollover amount thereafter paid from the plan.
( d ) *Examples.* The provisions of this section are illustrated by the following examples:
Example (1). (1) A establishes an individual retirement account described in section 408 (a) on January 1, 1976, when A is age 65. A's only contribution to the account is a rollover contribution described in section 402(a)(5). The trust agreement provides that A may at any time elect to have the balance in the account distributed in one of the following methods: (i) A single sum payment of the account, (ii) Equal or substantially equal semiannual payments over a period equal to A's life expectancy, or (iii) Equal or substantially equal semiannual payments over a period equal to the life expectancy of A and A's spouse. (2) The trust agreement further provides that although semiannual payments have commenced under option (ii) or (iii), A (or A's surviving spouse) may, by written notice to the trustee, receive all or a part of the balance remaining in the account. In addition, under option (ii), any balance remaining in the account at A's death is payable in a single sum to A's designated beneficiary. Under option (iii), any balance remaining in the account at the death of the survivor of A or A's spouse is payable in a single sum to a beneficiary designated by A or A's surviving spouse. (3) A elects option (iii), and the first semiannual payment is made to A on July 1, 1976. On that date, A's life expectancy is 15 years, and that of A's spouse is 22 years. Under option (iii), the semiannual payments to A or A's surviving spouse will continue until July 1, 1998. (4) A dies on November 20, 1978. On December 15, 1978, the trust agreement is modified so that A's surviving spouse no longer may elect to receive all or part of the balance remaining in the account. The value of the semiannual payments payable to A's spouse is excluded from A's gross estate under section 2039(e). (5) A's spouse dies July 12, 1981, and the single sum payment payable on account of the death of A's spouse is paid to the designated beneficiary on August 1, 1981. Notwithstanding that the balance in the account was paid to the designated beneficiary within 36 months after A's death, the value of the semiannual payments payable to A's spouse are excluded from A's gross estate, since at A's death those semiannual payments were to be paid over a period extending beyond 36 months. Section 2039(e) does not apply to exclude any amount from the estate of A's spouse, because A's spouse was only a beneficiary and not the individual on whose behalf the account was established.
Example (2). Assume the same facts as in example (1), except that the trust agreement is not modified so that A's surviving spouse no longer may elect to receive all or part of the balance remaining in the account (see (2) and (4) in example (1)). Instead, the balance of the account is applied toward the purchase of a contract providing an immediate annuity, the contract is distributed to A's surviving spouse on December 15, 1978, and under section 408 the contract is not included in the gross income of the spouse upon its distribution. The value of the annuity contract is excluded from A's gross estate, if the contract provides for a series of substantially equal periodic payments (within the meaning of paragraph (b) of this section) to be made over the life of A's surviving spouse or over a period not ending before the date 36 months after A's death.
Example (3). (1) B establishes an individual retirement plan described in section 408(a) (“IRA B”) on February 6, 1981, in order to receive a $220,000 rollover contribution from a qualified plan, as described in section 402(a)(5). B dies August 14, 1981. C, an individual, is the sole beneficiary under IRA B. The amount in IRA B ($238,000) is payable to C in whole or part as C may elect. Because the amount in IRA B is payable to C as other than a qualifying annuity, within the meaning of paragraph (b) of this section, no amount is excluded from B's gross estate under section 2039(e). (2) On October 17, 1981, C contributes $1,500 on C's own behalf to IRA B. Under § 1.408-2(b)(7)(ii), C's contribution will cause IRA B to be treated as being maintained by and on behalf of C (“IRA C”) and C's making the contribution constitutes an election to which paragraph (c)(5) of this section applies. The balance in IRA C immediately before C's contribution is $240,000. Accordingly, the amount with respect to which C made the election is $240,000. (3) C dies January 19, 1982. E, an individual, is the sole beneficiary under the plan, and the amounts payable to E ($242,000) are payable as a qualifying annuity, within the meaning of paragraph (b) of this section. (4) The rules described in section 2039(e) and this section are applied with respect to the gross estate of C without regard to whether amounts now payable under IRA C were or were not excluded from B's gross estate. Under paragraph (c) of this section, the amount not excluded from C's gross estate is the value of the qualifying annuity payable to E ($242,000), multiplied by the fraction $240,000/($240,000 + $1,500). Thus, the amount not excluded from C's gross estate is $240,497. [($242,000) ($240,000 ($240,000 + $1,500)) = $240,497.] The amount excluded is therefore $1,503 ($242,000−$240,497).
Example (4). (1) F, an individual, establishes an individual retirement plan (“IRA F1”) in 1977 and makes $1,250 annual contributions for 1977, 1978, 1979 and 1980 (4 × $1,250 = $5,000), each of which is deducted by F under section 219. In February 1980, F receives an $85,000 distribution on account of the death of G, F's spouse, from the qualified plan of G's former employer, and rolls it over into IRA F1, under section 402(a)(7). Because IRA F1 includes a rollover contribution under section 402(a)(7), paragraph (c)(4) of this section applies. In 1981, F's entire interest in IRA F1, $100,000, is paid to F and contributed to another individual retirement plan (“IRA F2”) under section 408(d)(3)(A)(i). IRA F2 is a transferee plan to which paragraph (c)(6) of this section applies because of the rollover. F makes a $1,500 deductible contribution to IRA F2 for 1981. (2) F dies in 1984. The balance in IRA F2 ($146,000) is payable to G, an individual, as a qualifying annuity, within the meaning of paragraph (b) of this section. (3) Under paragraph (c) of this section, the amount *not* excluded from F's gross estate is the value of the qualifying annuity payable under IRA F2 multiplied by the fraction $96,700/$101,500. Accordingly, the amount not excluded is $139,096. [($146,000) ($96,700/$101,500) = $139,096.] The amount excluded is $6,904 ($146,000−$139,096). (4) The numerator of the fraction ($96,700) is determined by multiplying the amount rolled over from IRA F1 to IRA F2 ($100,000) by a fraction, the numerator of which is the amount of the rollover contribution to IRA F1 ($85,000), and the denominator of which is the total contributions to IRA F1 ($85,000 + $5,000 = $90,000). [($100,000) ($85,000/$90,000) = $96,700.] (5) The denominator of the fraction ($101,500) is the sum of the contributions to IRA F2 (the $100,000 rollover contribution from IRA F1, and the $1,500 annual contribution to IRA F2).
[T.D. 7761, 46 FR 7305, Jan. 23, 1981; 46 FR 17191, Mar. 18, 1981, as amended by T.D. 8540, 59 FR 30103, June 10, 1994]