667. How are life estates, remainders, and private annuities valued?Nuco Employeercline212014-06-23T00:17:00Z2014-06-23T00:17:00Z417108094Summit Business Media14744976014Site Map/Transfer Taxation/Federal Gift Taxation/General Gift Tax/Valuation gift estate tax2005-01-25T00:00:00ZTaxFactsDefaultArticleSite Map/Transfer Taxation/Quick Clicks/Valuation119660909-00-tf1.xml909.00;#2378;#2420;#2422;#0x010100C568DB52D9D0A14D9B2FDCC96666E9F2007948130EC3DB064584E219954237AF3900242457EFB8B24247815D688C526CD44D009C4E67E972694125ABDA91AC61F5E51FTax Facts 1How are life estates, remainders, and private annuities valued?107700.000000000TaxFactsDefaultArticleSBMEDIA\moss-admin2010-01-19T07:26:50Z667. How are life estates, remainders, and private annuities valued?Life estates, estates for a term of years, remainder interests, and private annuities are generally valued by use of the government’s valuation tables (see below).Fehrs v. U.S., 45 AFTR 2d 80-1695, 79-2 USTC ¶13,324 (Ct. Cl. 1979). However, it has been held that the tables are only presumptively correct, and that in exceptional cases where there is strong evidence at the date of valuation that the life by which an interest is measured has an expectation of life longer or shorter than the tables indicate, that interest may be valued according to the facts at hand rather than according to the tables.Est. of Carter v. U.S., 921 F. 2d 63, 91-1 USTC ¶60,054 (5th Cir. 1991); Dunigan v. U.S., 434 F.2d 892 (5th Cir. 1970); Est. of Hoelzel v. Comm., 28 TC 384 (1957), acq. 1957-2 CB 5; Est. of Jennings v. Comm., 10 TC 323 (1948), nonacq. 1953-1 CB 5; Ellis Sarasota Bank & Trust Co. v. U.S., 77-2 USTC ¶13,204 (M.D. Fla. 1977). On the other hand, the government tables must be used even though the life tenant or life annuitant is in poor health at the date of valuation if the tenant’s or annuitant’s time of death is neither predictable nor imminent.Miami Beach First Nat’l Bank v. U.S., 443 F.2d 116 (5th Cir. 1971); Bank of Cal. (Est. of Manning) v. U.S., 82-1 USTC ¶13,461 (C.D. Cal. 1980); Est. of Fabric v. Comm., 83 TC 932 (1984). Account may not be taken of facts later coming to light but not available at the date of valuation; i.e., the interest may not be valued through the aid of hindsight.U.S. v. Provident Trust Co., 291 U.S. 272 (1934); Est. of Van Horne v. Comm., 720 F. 2d 1114, 83-2 USTC ¶13,548 (9th Cir. 1983), aff’g 78 TC 728 (1982), cert. den. Planning Point: Life annuitants should seek a medical evaluation and receive a written report at the time a private annuity contract or similar arrangement is executed to establish the individual’s health status.Regulations provide that the standard valuation tables are not to be used where the individual who is a measuring life is terminally ill (defined as a person with an incurable illness or other deteriorating physical condition and at least a 50% probability of dying within one year). However, if an individual survives for 18 months after the transaction, the individual is presumed to have not been terminally ill at the time of the transaction unless the contrary is established by clear and convincing evidence.Treas. Regs. §§1.7520-3(b)(3), 20.7520-3(b)(3), 25.7520-3(b)(3).The estate and gift tax valuation tables are based on an assumed interest rate. Departure from strict application of the tables is permissible in exceptional cases where use of the tables would violate reason and fact. For example, where transferred property may yield no income at all or the income is definitely determinable by other means.Morgan v. Comm., 42 TC 1080 (1964), aff’d 353 F.2d 209 (4th Cir. 1965); Hanley v. U.S., 63 F. Supp. 73 (Ct. Cl. 1945). However, the IRS will not allow such departure on a mere showing that past income yield from trust assets has been substantially lower than the rate assumed in the tables.Rev. Rul. 77-195, 1977-1 CB 295. Nor will departure be allowed simply because the property transferred as a gift in trust is nonincome producing if the trustee has power to convert it to income producing property.Rev. Rul. 79-280, 1979-2 CB 340.Regulations provide that the standard valuation tables are not to be used to value an annuity if, considering the assumed interest rate, the trust is expected to exhaust the fund before the last possible annuity payment is made in full (measuring life survival to age 110 is assumed for this purpose). For a fixed annuity (i.e., annuity amount is payable for a term certain, or for one or two lives) payable annually at the end of the year, the corpus is assumed to be sufficient to make all payments if the assumed interest rate is greater than or equal to the annuity payment percentage (i.e., the amount of the annual annuity payment divided by the initial value of the corpus). If the annuity payment percentage exceeds the assumed interest rate and the annuity is for a term certain, multiply the annual annuity payment by the term certain annuity factor (derived from the Term Certain Remainder Factors Table found in Appendix C). If the annuity payment percentage exceeds the assumed interest rate and the annuity is for one or two lives, multiply the annual annuity payment by the term certain annuity factor (derived from the Term Certain Remainder Factors Table found in Appendix C) for a term equal to 110 minus the age of the youngest measuring life. If the present value for a term certain annuity, as derived in either of the two preceding sentences, exceeds the fund from which the annuity is to be paid, a special IRC Section 7520 valuation factor may be required to take into account the exhaustion of the fund. Adjustments in the computations described above would be required if payment terms differ from those described.Treas. Regs. §§1.7520-3(b)(2)(i), 20.7520-3(b)(2)(i), 25.7520-3(b)(2)(i).Example. Donor, age 60, transfers $1,000,000 to a trust. The trust will pay $100,000 a year to charity for the life of donor, with remainder to the donor’s child. The IRC Section 7520 interest rate for the transfer is 6.8%. Since the annuity payment percentage of 10% ($100,000 annual payment divided by $1,000,000 initial value of trust fund) exceeds the 6.8% assumed interest rate, it cannot be assumed the annuity payments will not exhaust the trust. Therefore, subtract donor’s age 60 from 110, resulting in a term of 50 years. The remainder factor for a term of 50 years at 6.8% interest is .037277 (Term Certain Remainder Factors Table). The life income factor equals one minus the remainder factor of .037277, or .962723. The annuity factor equals the life income factor of .962723 divided by the assumed interest rate of 6.8%, or 14.1577. The present value of a term certain annuity equals $1,415,770 ($100,000 annual payment multiplied by 14.1577 annuity factor). Since this exceeds the value of the trust fund of $1,000,000, special IRC Section 7520 valuation factors will be required to take into account the exhaustion of the fund.See Treas. Reg. §25.7520-3(b)(2)(v)(Ex. 5).The Regulations provide that the standard valuation tables are not to be used to value an income interest, unless the income beneficiary is given an income interest which, in light of the trust, will, or other instrument, or state law, is in accord with an income interest which the principles of the laws of trust would provide consistent with the value of the trust corpus and its preservation. Also, the standard valuation tables are not to be used to value a use interest, unless the beneficiary is given a use interest which, in light of the trust, will, or other instrument, or state law, is in accord with an interest given to a life tenant or term holder. Standard valuation tables are not to be used for an income interest if (1) income or other enjoyment can be withheld, diverted, or accumulated for another’s use without the consent of the income beneficiary, or (2) corpus can be withdrawn for another’s use without the consent of the income beneficiary or accountability to such beneficiary. Thus, special factors may be required in conjunction with unproductive property, if the beneficiary has no right to require that the trustee make the trust income producing, and with Crummey withdrawal powers, if the power permits a diversion of income or principal to a person other than the income beneficiary during the income term.Treas. Regs. §§1.7520-3(b)(2)(ii), 20.7520-3(b)(2)(ii), 25.7520-3(b)(2)(ii).A remainder or reversionary interest is to be valued using the standard valuation factors only if the preceding interest (e.g., an income or annuity interest) adequately preserves and protects the remainder or reversionary interest (e.g., from erosion, invasion, depletion, or damage) until the interest takes effect.Treas. Regs. §§1.7520-3(b)(2)(iii), 20.7520-3(b)(2)(iii), 25.7520-3(b)(2)(iii).There is a split in the courts regarding lottery winnings includable in the gross estate as to whether they should be valued as an annuity under the standard valuation tables or whether a discount is available where state law prohibited the assignment of state lottery winnings.Est. of Shackelford v. U.S., 2001-2 USTC ¶60,417 (9th Cir. 2001), aff’g 99-2 USTC ¶60,356 (E.D. Calif. 1999); Est. of Cook v. Comm., 349 F. 3d 850, 2003-2 USTC ¶60,471 (5th Cir. 2003), aff’g TC Memo 2001-170; Est. of Gribauskas v. Comm., 342 F. 3d 85, 2003-2 USTC ¶60,466 (2nd Cir. 2003), rev’g 116 TC 142 (2001); Est. of Donovan v. Comm., 2005-1 USTC ¶60,500 (DC Mass. 2005); Negron v. U.S., 553 F. 3d 1013, 2009-1 USTC ¶60,571 (6th Cir. 2009), rev’g 502 F. Supp. 682, 2007-1 USTC ¶60,541 (ND OH 2007). Structured settlement payments should be valued as an annuity under the standard valuation tables without discount for lack of marketability.Est. of Anthony v. U.S., 2008-1 USTC ¶60,558 (5th Cir. 2008), aff’g 2005-1 USTC ¶60,504 (M.D. La. 2005). Taxpayers wishing to challenge use of such tables to value lottery winnings will need to establish a market value as an alternative to the tables and that such value departs substantially from Section 7520 tables.Davis v. U.S., 491 F. Supp. 2d 192, 2007-1 USTC ¶60,542 (DC NH 2007).Valuation TablesValuation tables using up-to-date interest and mortality factors must be used where the valuation date occurs on or after May 1, 1989. The value of an annuity, an interest for life or term of years, or a reversionary or remainder interest, is determined using tables and an interest rate (rounded to the nearest 2/10ths of 1%) equal to 120% of the federal midterm rate in effect for the month in which the valuation date occurs.IRC Sec. 7520(a). An interest rate falling midway between any 2/10ths of a percent is rounded up.Treas. Reg. §20.7520-1(b)(1). However, the valuation tables are not to be used with respect to any of the income tax provisions relating to qualified pension plans (including tax sheltered annuities and IRAs) contained in IRC Sections 401 to 419A.IRC Sec. 7520(b). The Section 7520 interest rate for each month is published at HYPERLINK "http://pro.nuco.com/Pages/default.aspx" http://pro.nuco.com/Pages/default.aspx.See Appendix C for valuation tables. (See also, Tax Facts on Investments, Appendix A, for unitrust tables (other than two-life factors or unitrust factors)). IRS Publications 1457 and 1458 contain examples of use of the valuation table and sources for the tables. Where the standard valuation table is to be used but the interest rate or payout rate to be used is between rates in the table, interpolation (an algebraic calculation of a number falling between table factors) is required.Treas. Regs. §§1.642(c)-6(e)(5), 1.664-4(e)(4).If an income, estate, or gift tax charitable deduction is allowable with respect to the property transferred, the taxpayer can elect to use the interest rate for either of the two months preceding the month in which the valuation date occurs. However, if a transfer of more than one interest in the same property is made with respect to which the taxpayer could use the same interest rate, such interest rate is to be used with respect to each such interest.IRC Sec. 7520(a).