The issue:
New York City Code (§13-3417) provides for the payment of accidental death benefits to certain specified beneficiaries of a member of the the New York Fire Department Subchapter Two Pension Fund, if the member’s death was the natural and proximate result of an accident sustained while in the performance of duty. Section (a) provides for the payment to the decedent’s estate, or to such person designated by the decedent, of the decedent’s accumulated contributions to the pension fund. Section (b) provides for the payment of an annuity equal to one-half of the member’s salary to the decedent’s surviving spouse for life, or to cetain other specified beneficiaries.
In addition to the benefits provided by New York City, under applicable New York State law, a special death benefit is payable to the decedent’s surviving spouse for life, or if no surviving spouse to the decedent’s children under the age of 18 (age 23 if the child is a student). This special death benefit is payable if the decedent was a member of a pension or retirement system of a police department or paid fire department of a city, town, or village and the decedent died as a result of injuries sustained in the performance of duty. The benefit is a pension equal to the decedent’s salary, reduced by any death benefit payable by the city, town, or village in the form of a pension and any social security and worker’s compensation benefits. These benefits are payable with funds appropriated from the New York State’s general fund.
How are these benefits treated for estate tax purposes?
The normal rule-- IRC § 2039(a) provides for the inclusion in the decedent's gross estate of 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 (other than insurance on the decedent's life) if, under the contract or agreement, an annuity or other payment was payable to the decedent, or the decedent possessed the right to receive the annuity or other payment for life or for any period not ascertainable without reference to decedent's death or for any period which does not in fact end before decedent's death. This applies only the part of the value of the annuity or other payment receivable under the contract or agreement as is proportionate to that part of the purchase price therefor contributed by the decedent. Any contributions by the decedent's employer shall be considered to be contributed by the decedent.
In Rev-Rul 2002-39, the IRS recently determined the following:
The benefit under section(a) represents a return of the Decedent’s contributions to the pension fund and is payable to any beneficiary, including the Decedent’s estate, designated by the Decedent. This payment constitutes property in which Decedent had an interest at the time of death. Accordingly, that payment is includible in Decedent’s gross estate under § 2033.
However, the annuities payable to Decedent’s spouse under section(b) are not payable pursuant to any form of contract or agreement arising by reason of Decedent’s employment. Rather, similar to the situations presented in Rev. Rul. 76-501 and other rulings, these benefits are payable pursuant to public statutory laws providing for a system of benefit payments to the dependents of firefighters, but only if the firefighter dies in the line of duty. Thus, these benefits are distinguishable from survivor benefits payable on the death of a retiree (or the death of an employee before retirement) under a pension plan intended to provide post-retirement benefits. In addition, the benefits are payable only to certain specified individuals after Decedent’s death, and thus, Decedent had no right to receive the payments during life. Accordingly, the accidental death benefits payable pursuant to section (b) (and a similar benefit under § 208-f of the N.Y. Gen. Mun. Law) are not includible in the Decedent’s gross estate.
In addition, these benefits are funded by New York City and New York State and are payable to beneficiaries, other than the Decedent’s estate, specifically designated by the statute. Thus, because the Decedent possessed no property or ownership rights in these death benefits, the value of these annuities is not includible in Decedent’s gross estate under § 2033.
CONCLUSION
The accidental death benefits payable pursuant to New York City and New York
State laws to specified beneficiaries of a deceased New York City firefighter or police officer who died in the line of duty are not includible in the decedent’s gross estate, except to the extent the benefits represent a return of the decedent’s contributions to the pension fund.
