Federal Estate Tax Treatment Of Uniformed Services Annuities
Prior to 1982, Uniformed Services annuities (SBP, SSBP, RCSBP, RSFPP) were specifically excluded from federal estate taxes. However, both the Tax Equity and Fiscal Responsibility Act of 1982 (P.L. 97-248) and the Tax Reform Act of 1984 (P.L. 98-369) made significant changes regarding how SBP annuities are taxed under federal estate tax law. Generally, the estate taxation of an SBP annuity depends on when the member retired from the Armed Forces, the type of annuity election made, whether changes have been made to the SBP election, and whether the value of the SBP annuity exceeds the unified credit ($650,000 for 1999) (see chart for increases through year 2006 and thereafter).
Increase in Estate and Gift Tax Credit
| In Year | Amount |
|
2000 |
$675,000 |
|
2001 |
$675,000 |
|
2002 |
$700,000 |
|
2003 |
$700,000 |
|
2004 |
$850,000 |
|
2005 |
$950,000 |
|
2006 and thereafter |
$1,000,000 |
Because of the complexity and technicality of this issue, written guidance was sought from the Internal Revenue Service, Department of the Treasury. The following reflects IRS guidance received by letter, CC:DOM:P&SI:4/COR-105265-97, dated May 22, 1997 and reaffirmed by letter in 1999.
Federal Estate Tax
The value of all property in which the decedent has an interest (including annuities) is included
in the decedent's gross estate and described on Form 706 of the federal estate tax return. All annuities are listed
on Schedule I. Added to this total are all adjusted taxable gifts made by the decedent prior to death. Various
qualifying deductions are then taken from the gross estate.
One of the deductions is the marital deduction or qualifying property that is included in the gross estate and that passes to the surviving spouse. After other adjustments are made to the gross estate to arrive at the taxable estate, a unified credit is allowed against the tentative estate tax. This unified credit is equivalent to the tax on $650,000 (for 1999) of property in the estate. After taking into account all deductions and credits against the tax, the remaining value of the estate is subject to a federal estate tax beginning at a marginal rate of 18 percent. Any estate tax is generally the liability of the estate, not the heirs. Since the unified credit is available for every individual, both the military member and spouse have use of a separate $650,000 (for 1999) unified credit. Thus, through proper planning, a military member and spouse can shelter property valued at $1,300,000 (for 1999) from federal estate tax through use of the unified credit. During the period of administration, the estate is liable for federal income tax on income earned by the estate only during that period.
Deceased Retiree's Gross Estate
Generally, paragraph 2039(a) of the Internal Revenue Code provides that, for federal estate tax purposes, the present
value of a survivor annuity is includible in the gross estate of a decedent if, under the contract or agreement,
an annuity was payable to the decedent.
In the case of the military Survivor Benefit Plan (SBP) for retirees dying after 1984, the general rule provides that the present value of the survivor benefit is includible in the decedent's gross estate. However, some or all of the value of the SBP benefit may be excluded from the decedent's gross estate depending on the date that the decedent retired and changes, if any, that the decedent made to the form of benefits under the plan after he/she retired. A change in the form of the benefits under a plan would include, but not be limited to, a change to the amount, type, term, or possibility of benefit. It would not include a mere change of beneficiary. The consequences of the different retirement dates and changes made under the Survivor Benefit Plan are as follows:
- For decedents who retired before January 1, 1983, (who were receiving benefits under the plan and had made an irrevocable election to the form of benefits before January 1, 1983, or, in the alternative, did not change the form of benefit after December 31, 1982), the entire present value of any survivor benefit is excludable from the decedent's gross estate. However, if the decedent made deposits pursuant to section 1438 or 1452(d) of Title 10, [both dealing with periods of time that a retiree was not entitled to military retired pay] the portion of the value of any survivor benefit that the deposits bear to the date of retirement value of all benefits would be includible in the decedent's gross estate.
If a decedent retired before January 1, 1983, and changed the form of benefit after December 31, 1982, but before July 18, 1984, a limited amount of the present value of survivor benefits is excludable from the decedent's gross estate. The excludable amount is $100,000 of the total present value of survivor benefits from all pension plans. The value of total survivor benefits from pension plans in excess of $100,000 is includible.
For any decedent who retired before January 1, 1983, and who changed the form of benefit after July 17, 1984, the entire present value of the survivor benefit is includible in the decedent's gross estate.
- For decedents who retired after December 31, 1982, (who were receiving benefits under the plan before January 1, 1985, and had made an irrevocable election as to the form of the benefits before July 18, 1984, or, in the alternative, had not changed the form of the benefits after July 17, 1984, and before death), up to $100,000 of the present value of all survivor pension benefits (from all sources) is excludable from the decedent's gross estate. The value of total survivor benefits from pension plans in excess of $100,000 is includible.
For decedents who retired after December 31, 1982, (who were receiving benefits under the plan before January 1, 1985, and had not made an irrevocable election to the form of the benefits before July 18, 1984, or, in the alternative, had changed the form of the benefits after July 17, 1984, and before death), the entire present value of the survivor benefit under the plan is includible in the decedent's gross estate.
- For decedents who retired after December 31, 1984, the entire present value of the survivor benefit is includible in the decedent's gross estate.
Deceased Retiree’s Gross Estate
| (1) | Retired before Jan. 1, 1983 | No tax on SBP |
| Retired before Jan. 1, 1983 – changed form of benefits after Dec. 31, 1982 but before July 18, 1984 | $100,000 excludable from entire present value of SBP | |
| Retired before Jan. 1, 1983 and changed form of benefits after July 17, 1984. | Tax on entire present value of SBP | |
| (2) | Retired after Dec. 31, 1982 and made election as to form of the benefits before July 18, 1984. | Up to $100,000 excludable from entire present value of SBP |
| Retired after Dec. 31, 1982 and had not made election as to form of benefits before July 18, 1984. | Tax on entire present value of SBP |
|
(3) |
Retired after Dec. 31, 1984 |
Tax on entire present value of SBP. |
Estate Tax Marital Deduction in Decedent's Estate
The allowance of an estate tax marital deduction in the decedent's estate depends
upon: 1) whether any benefits are includible in the decedent's gross estate; and 2) whether any of the benefits
are payable to the decedent's surviving spouse.
- For a decedent who elected to provide for a survivor annuity payable only to the surviving spouse (with no survivor benefit to any other person), the decedent's estate qualifies for a marital deduction for the present value of the survivor annuity that passes to the surviving spouse and that is included in the decedent's gross estate. The decedent's estate does not have to make any election to claim this marital deduction.
- For a decedent who elected to provide a survivor annuity that is paid first to the decedent's spouse and, upon the spouse's death (after the decedent's death), to other persons such as children, the present value of the survivor annuity will automatically qualify for the marital deduction in the decedent's estate as qualified terminable interest property (QTIP).
The decedent's estate can elect not to treat the survivor annuity as QTIP property on the Schedule M. If this election is made, the decedent's estate will not get a marital deduction for the value of the survivor annuity included in the decedent's gross estate but the value of any survivor annuity passing to the children upon the death of the surviving spouse will not be included in the surviving spouse's gross estate.
- For a decedent who had elected to provide a survivor annuity only to eligible children, the decedent's estate is not eligible for a marital deduction for the value of the children's benefits included in the decedent's gross estate.
Estate Tax Marital Deduction in Decedent's Estate
| (1) | Spouse only SBP election |
Qualifies |
| (2) | Spouse and child SBP election | Qualifies as QTIP |
| (3) | Child only SBP election | Does not qualify |
Deceased Survivor Beneficiary's Gross Estate
The value of the pension benefits includible in the surviving spouse's gross
estate upon his/her death after the decedent's death is not affected by the date of retirement of the decedent,
the date of death of the decedent, or the date of death of the survivor beneficiary-spouse.
- For the estate of the surviving spouse of a decedent who elected to provide a survivor annuity only to the spouse, upon the death of the surviving spouse (after the decedent's death), the value of the survivor benefits are not included in the spouse's gross estate, since the benefits cease upon the death of the surviving spouse.
- For the estate of the surviving spouse of a decedent who elected to provide a survivor annuity for the decedent's spouse and, upon that spouse's death, to the children, the present value of the surviving children's benefit (at the spouse's date of death) is includible in the spouse's gross estate if the automatic marital deduction QTIP election, described above, applied. Upon the subsequent death of any eligible child, the value of the survivor benefits will not be includible in that child's gross estate for federal estate tax purposes. As noted above, if the decedent's estate elected not to treat the annuity as QTIP property, the present value of the children's survivor benefits will not be included in the surviving spouse's gross estate.
- For the estate of the surviving spouse of a decedent who elected to provide the survivor annuity to only the eligible children, upon the death of the surviving spouse or the death of each child, the value of the survivor benefits will not be included in the gross estate of either the surviving spouse of any child.
Surviving Spouse Not a United States Citizen
Generally, if property that is included in the member's gross estate passes to the member's surviving spouse who
is not a United States citizen, the value of that property will not qualify for an estate tax marital deduction.
However, this rule does not apply if the property, which must otherwise qualify for the marital deduction, passes
to the surviving spouse in a qualified domestic trust (QDT).
In general, a QDT is a trust that otherwise satisfies the qualifications for a marital deduction and, in addition, the trust 1) requires that at least one trustee be a United States citizen or a domestic corporation; 2) gives the trustee the power to withhold from any trust distribution amounts needed to pay a special QDT tax on distributions of corpus; and 3) meets certain specified requirements to ensure collection of the special QDT tax. The QDT must either be established by a document executed under the laws of the United States or a foreign jurisdiction. If executed under the laws of a foreign jurisdiction, such as a foreign will or trust, the trust must be maintained under the laws of a state of the United States or the District of Columbia and the document directs that the laws of a particular state of the United States or the District of Columbia govern the administration of the trust, and that direction is effective under the applicable local law.
- An irrevocable election to treat the trust as a QDT must be made on the last timely filed federal estate tax return or, if a timely return is not filed, on the first federal estate tax return filed after the due date.
- A trust may be reformed in a judicial or nonjudicial reformation in order to meet the qualifications of a QDT. Also, a trust that will satisfy the QDT requirements may be created by the spouse after the decedent's death, if certain conditions are satisfied.
- Rules governing these trusts are complicated and a member who may be affected by these rules should be encouraged to contact a tax advisor to ensure compliance with the rules.
Computation of the Present Value of a Survivor Annuity
In order to calculate the present value of the survivor annuity at the death
of the member or the subsequent death of the surviving spouse, the following formula should be used:
| Annual Annuity Amount | x | Beneficiary’s Annuity Factor | x | Monthly Adjustment Factor | = | Present Value of Survivor Annuity |
The beneficiary's annuity factor to be used in this formula for purposes of valuing annuities is computed by using the applicable federal rate described in paragraph 7520 (Internal Revenue Code) for the month in which the decedent died and the remainder factor in Table S in paragraph 20.2031-7(d) (6) of the Estate Tax Regulations. The applicable federal rate is published monthly in the Internal Revenue Service (IRS) Bulletin. The remainder factor from Table S must be converted to an annuity factor under the method set forth in paragraph 20.2301-7(d) (2) (iv) (a).
The monthly adjustment factor is in Tables J and K in paragraph 20.2031-7(d) (6) of the Estate Tax Regulations.
Editor's Note: IRS Regulations and Estate Tax Tables are available on the IRS Web site:
http://www.access.gpo.gov/nara/cfr/index.html
http://www.access.gpo.gov/nara/cfr
Editor's Note: For more information on federal estate taxation, please refer to IRS Publications 950 "Introduction to Estate and Gift Taxes," or 559 "Tax Information for Survivors, Executors, and Administrators", or write to the Department of the Treasury, Internal Revenue Service, ATTN: CC: P&SI: 4, Washington, DC 20224.
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