Treatment of employment benefits depends upon the nature of the payments made. A voluntary payment made by an employer to a deceased employee’s surviving spouse or family is not taxed under Estate and Gift Tax Code. Despite the fact that the death prompted the payments, the employee had no right or interested in such payments before or at death. Conversely, if death benefits are paid to a specified beneficiary as a part of the bargained for employment contract, they are included in the deceased employee’s gross estate. Although the employee did not receive the payment, he or she possessed at death a contractual right that such payments would be made to the designated beneficiary.
There is a split in authority between the courts and the IRS when it comes to other types of arrangements, such as survivor benefit plans that are forfeitable or benefit plans that are terminable at the will of the employer. Although, such survivor benefit plans were found to represent a valuable “expectancy” and were paid, some courts did not find sufficient property interest in such “expectation.”
Nevertheless, the IRS has taken the position that it would tax any survivor benefits that were not in fact terminated or forfeited before death and where benefits were actually paid to survivors.
Annuities and other payments are specifically addressed in the Code. Under the Code, “the gross estate shall include the value of an annuity or other payment receivable by any beneficiary by reason of surviving the decedent under any form of contract or agreement…” The survivor’s benefit need not be in the form of an annuity. Any payment that becomes payable to a survivor is taxable in the decedent’s estate. Moreover, the annuity payable to the beneficiary after the decedent’s death cannot be triggered at a scheduled time or upon the happening of an event irrespective of whether the decedent is then living or dead. Finally, the regulation make clear, pursuant to a contract or agreement is not limited to a formal, commercial annuity, but reaches any arrangement, understanding, or plan, or any combination thereof arising by reason of the decedent’s employment. In sum, the estate tax is imposed upon that value of the survivor’s benefit that is proportionate to contributions made by the decedent.