Actuarial Tables Exceptions
Federal RegisterDec 13, 1995
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1, 20, and 25
[TD 8630]
RIN 1545-AR56
Actuarial Tables Exceptions
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final income, estate, and gift tax
regulations relating to exceptions to the use of the valuation tables
in the regulations for valuing annuities, interests for life or a term
of years, and remainder or reversionary interests, the valuation of
which was the subject of final regulations published on June 10, 1994.
These regulations are necessary in order to provide guidance consistent
with court decisions concluding that the valuation tables are not to be
used in certain situations.
EFFECTIVE DATE: These regulations are effective December 13, 1995.
FOR FURTHER INFORMATION CONTACT: William L. Blodgett, telephone (202)
622-3090 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On June 10, 1994, the IRS published in the Federal Register (59 FR
30100) final income tax regulations under sections 170, 642, 664 and
7520 of the Internal Revenue Code (Code), and final estate and gift tax
regulations under sections 2031, 2512 and 7520 of the Code providing
actuarial tables to be used in valuing annuities, interests for life or
a term of years, and remainder or reversionary interests under section
7520. On June 10, 1994, the IRS also published in the Federal Register
(59 FR 30180) proposed amendments to the income, estate, and gift tax
regulations prescribing circumstances when the published actuarial
tables cannot be used to value interests. This regulation finalizes
those amendments.
Written comments responding to the notice of proposed rulemaking
were received. Requests for a public hearing were also received but
were subsequently withdrawn. After consideration of all the comments
received, those amendments are revised and adopted by this Treasury
decision.
Explanation of Provisions
Section 7520(a), which is effective for transfers after April 30,
1989, provides that the value of annuities, interests for life or a
term of years, and remainder or reversionary interests is to be
determined under tables published by the IRS. Section 7520(e) provides
that, for purposes of section 7520, the term tables includes formulas.
Section 7520(b) provides that section 7520 shall not apply for purposes
of any provision specified in regulations. The Conference Report
accompanying the Technical and Miscellaneous Revenue Act of 1988, H.R.
Conf. Rep. No. 1104, 100th Cong., 2d Sess. 113 (1988) (1988-3 C.B.
603), states that section 7520 does not apply in ``situations specified
in Treasury regulations.'' A summary of the principal comments received
and revisions made in the final regulations in response to those
comments is provided below.
1. Valuation of Annuities, Income Interests, etc.
Under the proposed regulations, the tables cannot be used if the
instrument of transfer does not provide the beneficiary of the annuity,
income interest, or remainder interest with the degree of beneficial
enjoyment that is consistent with the traditional character of that
property interest under applicable local law. One comment letter
suggested that, as a result of enactment of section 2702, it may no
longer be necessary to prescribe special rules in the case of a trust
corpus consisting of nonproductive property. It was decided to retain
these rules because this issue will continue to arise in certain
situations where section 2702 does not apply; e.g., the valuation of a
gift of an income interest for purposes of determining the section
2503(b) gift tax exclusion; the valuation of the bequest of an income
interest for purposes of the section 2013 estate tax credit.
In response to comments, the final regulations provide additional
guidance for determining under what circumstances a life tenant or term
certain beneficiary of tangible property possesses adequate beneficial
use such that the tables would be used to value the interest.
A number of comments were received on the valuation of an annuity
that is payable from a trust corpus that will exhaust prior to the
annuitant reaching the presumed terminal age prescribed by the tables
(age 110). Under the proposed regulations, the interest would be
valued, not as a right to receive the annuity for the life of the
annuitant, but rather as the right to receive the annuity for the
shorter of the life of the annuitant or the date on which the corpus
will exhaust. One commentator agreed that the possibility of exhaustion
of corpus should be taken into account in cases of relatively severe
underfunding of the trust. However, it was suggested that, if the
underfunding was relatively less severe, it should be disregarded.
After further consideration of this issue, the IRS has concluded that
the method described in the proposed regulations for determining the
value of the annuity is consistent with fundamental principles for
determining present value and long-standing IRS position. See, Rev.
Rul. 77-454 (1977-2 C.B. 351); Rev. Rul. 70-452 (1970-2 C.B. 199);
Moffett v. Commissioner, 269 F.2d 738 (4th Cir. 1959); United States v.
Dean, 224 F.2d 26 (1st Cir. 1955). However, in response to requests,
the explanation of the methodology and computation has been amplified.
2. Terminal Illness
Under the proposed regulations, the tables cannot be used if the
individual, who is the measuring life with respect to the property
interest, is terminally ill. Under the proposed regulations, the
individual is terminally ill if that individual was known to have an
incurable illness or deteriorating physical condition such that there
is at
[[Page 63914]]
least a 50 percent probability that the individual will die within one
year.
One commentator suggested that the value of a property interest
that is dependent upon a measuring life should be determined in all
events based on the mortality component contained in Table 80CNSMT
(which is based on the life experience of the general population),
rather than a mortality component that reflects the actual terminally
ill condition of the individual. The commentator also suggested that if
departure from the actuarial tables is deemed appropriate in the case
of terminally ill individuals, then the standard in Rev. Rul. 80-80
(1980-1 C.B. 194), which is not explicitly expressed in the form of a
percentage probability of survival (as is the standard in the proposed
regulations), adequately differentiates between individuals that should
not be considered terminally ill and those that should. This
commentator also questioned whether a percentage probability standard,
such as the one used in the proposed regulations, would be feasible to
administer.
The IRS continues to believe that mortality tables such as Table
80CNSMT should not be used to predict the survival probabilities of an
individual whose time of death is reasonably predictable based on the
facts presented. To determine whether the proposed test for classifying
an individual as terminally ill would be feasible, the IRS consulted
with a number of medical specialists. Medical experts called upon to
assess the probability of survival of a terminally ill individual base
their assessment on statistical compilations of the percentage of
individuals who survive for a specified period of time when suffering
with a particular disease. Thus, the IRS believes that a test for
classifying an individual as terminally ill can reasonably be based
upon the probability of survival for a specified period of time.
One commentator suggested that the mortality test should take into
account the actual period of survival after the transfer. For example,
if the individual actually survived for one year, that individual
should not be deemed to have been terminally ill. Although post-
transaction events are not ordinarily determinative for valuation
purposes, such events may provide evidence of value as of the valuation
date. Accordingly, the final regulations provide a presumption that if
the individual who is the measuring life survives for eighteen months
or longer after the transfer, that individual shall be presumed to have
not been terminally ill on the date of the transfer unless the contrary
is established by clear and convincing evidence.
The commentator also questioned whether the proposed test for
classifying an individual as terminally ill would result in the
classification of elderly people suffering from the general infirmities
of old age as ``terminally ill.'' The IRS continues to believe that the
test should be consistently applied to people of all ages. Under the
regulations, the individual must be inflicted with an incurable illness
or other deteriorating physical condition that is life threatening.
Thus, elderly people suffering from the general infirmities of old age,
but not from a specific incurable life-threatening illness, would not
be considered terminally ill under the test. Consequently, if an
elderly person has one or more illnesses, none of which, standing alone
or considered together, is life-threatening, that person would not be
considered to be terminally ill.
The same commentator suggested that ``knowledge'' of the terminal
illness should be limited to actual knowledge by the taxpayer or the
decedent, rather than to ``knowledge'' by any of the parties involved.
However, limitation of the requisite ``knowledge'' to the taxpayer or
decedent would present a significant burden to the IRS regarding proof
and would present opportunities for easy circumvention. Thus, the IRS
believes that the requirement that the condition of the individual be
``known,'' although not necessarily by the taxpayer or decedent, is
reasonable.
Commentators suggested that the regulations should make it clear
that a special actuarial factor taking into account a transferor's
terminal illness may be used in valuing a transfer to a pooled income
fund. The final regulations incorporate that suggestion.
Comments were received that the language in Sec. 20.7520-
3(b)(3)(ii) of the proposed regulations regarding the valuation of a
property interest that is based upon a terminally ill measuring life,
for purposes of determining the applicable credit for tax on prior
transfers under section 2013, was ambiguous. Generally, if the final
determination of the estate tax liability in the transferor's estate
was dependent on the valuation of the life interest received by the
transferee, then the value of the property transferred, for purposes of
determining the credit allowable for the transferee's estate, is the
value determined previously for the transferor's estate. Section
20.7520-3(b)(3)(ii) of the final regulations clarifies this rule. The
IRS invites comments on whether the value of a reversionary interest
under section 673 should be determined without regard to the physical
condition of the decedent immediately before death, a related issue
that was raised by commentators.
3. Application of Actuarial Tables
One commentator suggested that the tables prescribed by the
regulations must be used for valuing all interests transferred between
April 30, 1989 (the effective date of section 7520) and December 13,
1995 (the effective date of the regulations). However, these
regulations generally adopt principles established in case law and
published IRS positions. See, e.g., O'Reilly v. Commissioner, 973 F.2d
1403 (8th Cir. 1992), rem'd, T.C.M. 1994-61 (underproductive income
interest); Estate of McLendon v. Commissioner, T.C.M. 1993-459; Rev.
Rul. 80-80 (1980-1 C.B. 194) (terminal illness of measuring life);
Moffett v. Commissioner, 269 F.2d 738 (4th Cir. 1959); Rev. Rul. 77-454
(1977-2 C.B. 351) (exhausting corpus). There is no indication that
Congress intended to supersede this well-established case law and
administrative ruling position when it enacted section 7520.
Consequently, in the case of transfers prior to the effective date of
these regulations, the question of whether a particular interest must
be valued based on the tables will be resolved based on applicable case
law and revenue rulings.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in EO 12866. Therefore, a
regulatory assessment is not required. It also has been determined that
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5)
and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to
these regulations, and, therefore, a Regulatory Flexibility Analysis is
not required. Pursuant to section 7805(f) of the Internal Revenue Code,
the notice of proposed rulemaking preceding these regulations was
submitted to the Small Business Administration for comment on its
impact on small business.
Drafting Information
The principal author of these regulations is William L. Blodgett,
Office of Assistant Chief Counsel (Passthroughs and Special
Industries), IRS. However, other personnel from the IRS and Treasury
Department participated in their development.
[[Page 63915]]
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 20
Estate taxes, Reporting and recordkeeping requirements.
26 CFR Part 25
Gift taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR parts 1, 20 and 25 are amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.7520-3 is amended by revising paragraph (b) and
adding a sentence at the end of paragraph (c) to read as follows:
Sec. 1.7520-3 Limitation on the application of section 7520.
* * * * *
(b) Other limitations on the application of section 7520--(1) In
general--(i) Ordinary beneficial interests. For purposes of this
section:
(A) An ordinary annuity interest is the right to receive a fixed
dollar amount at the end of each year during one or more measuring
lives or for some other defined period. A standard section 7520 annuity
factor for an ordinary annuity interest represents the present worth of
the right to receive $1.00 per year for a defined period, using the
interest rate prescribed under section 7520 for the appropriate month.
If an annuity interest is payable more often than annually or is
payable at the beginning of each period, a special adjustment must be
made in any computation with a standard section 7520 annuity factor.
(B) An ordinary income interest is the right to receive the income
from, or the use of, property during one or more measuring lives or for
some other defined period. A standard section 7520 income factor for an
ordinary income interest represents the present worth of the right to
receive the use of $1.00 for a defined period, using the interest rate
prescribed under section 7520 for the appropriate month.
(C) An ordinary remainder or reversionary interest is the right to
receive an interest in property at the end of one or more measuring
lives or some other defined period. A standard section 7520 remainder
factor for an ordinary remainder or reversionary interest represents
the present worth of the right to receive $1.00 at the end of a defined
period, using the interest rate prescribed under section 7520 for the
appropriate month.
(ii) Certain restricted beneficial interests. A restricted
beneficial interest is an annuity, income, remainder, or reversionary
interest that is subject to a contingency, power, or other restriction,
whether the restriction is provided for by the terms of the trust,
will, or other governing instrument or is caused by other
circumstances. In general, a standard section 7520 annuity, income, or
remainder factor may not be used to value a restricted beneficial
interest. However, a special section 7520 annuity, income, or remainder
factor may be used to value a restricted beneficial interest under some
circumstances. See paragraph (b)(4) Example 2 of this section, which
illustrates a situation where a special section 7520 actuarial factor
is needed to take into account the shorter life expectancy of the
terminally ill measuring life. See Sec. 1.7520-1(c) for requesting a
special factor from the Internal Revenue Service.
(iii) Other beneficial interests. If, under the provisions of this
paragraph (b), the interest rate and mortality components prescribed
under section 7520 are not applicable in determining the value of any
annuity, income, remainder, or reversionary interest, the actual fair
market value of the interest (determined without regard to section
7520) is based on all of the facts and circumstances if and to the
extent permitted by the Internal Revenue Code provision applicable to
the property interest.
(2) Provisions of governing instrument and other limitations on
source of payment--(i) Annuities. A standard section 7520 annuity
factor may not be used to determine the present value of an annuity for
a specified term of years or the life of one or more individuals unless
the effect of the trust, will, or other governing instrument is to
ensure that the annuity will be paid for the entire defined period. In
the case of an annuity payable from a trust or other limited fund, the
annuity is not considered payable for the entire defined period if,
considering the applicable section 7520 interest rate at the valuation
date of the transfer, the annuity is expected to exhaust the fund
before the last possible annuity payment is made in full. For this
purpose, it must be assumed that it is possible for each measuring life
to survive until age 110. For example, for a fixed annuity payable
annually at the end of each year, if the amount of the annuity payment
(expressed as a percentage of the initial corpus) is less than or equal
to the applicable section 7520 interest rate at the date of the
transfer, the corpus is assumed to be sufficient to make all payments.
If the percentage exceeds the applicable section 7520 interest rate and
the annuity is for a definite term of years, multiply the annual
annuity amount by the Table B term certain annuity factor, as described
in Sec. 1.7520-1(c)(1), for the number of years of the defined period.
If the percentage exceeds the applicable section 7520 interest rate and
the annuity is payable for the life of one or more individuals,
multiply the annual annuity amount by the Table B annuity factor for
110 years minus the age of the youngest individual. If the result
exceeds the limited fund, the annuity may exhaust the fund, and it will
be necessary to calculate a special section 7520 annuity factor that
takes into account the exhaustion of the trust or fund. This
computation would be modified, if appropriate, to take into account
annuities with different payment terms. See Sec. 25.7520-3(b)(2)(v)
Example 5 of this chapter, which provides an illustration involving an
annuity trust that is subject to exhaustion.
(ii) Income and similar interests--(A) Beneficial enjoyment. A
standard section 7520 income factor for an ordinary income interest may
not be used to determine the present value of an income or similar
interest in trust for a term of years or for the life of one or more
individuals unless the effect of the trust, will, or other governing
instrument is to provide the income beneficiary with that degree of
beneficial enjoyment of the property during the term of the income
interest that the principles of the law of trusts accord to a person
who is unqualifiedly designated as the income beneficiary of a trust
for a similar period of time. This degree of beneficial enjoyment is
provided only if it was the transferor's intent, as manifested by the
provisions of the governing instrument and the surrounding
circumstances, that the trust provide an income interest for the income
beneficiary during the specified period of time that is consistent with
the value of the trust corpus and with its preservation. In determining
whether a trust arrangement evidences that intention, the treatment
required or permitted with respect to individual items must be
considered in relation to the entire system provided for in the
administration of the subject trust. Similarly, in determining the
present
[[Page 63916]]
value of the right to use tangible property (whether or not in trust)
for one or more measuring lives or for some other specified period of
time, the interest rate component prescribed under section 7520 and
Sec. 1.7520-1 may not be used unless, during the specified period, the
effect of the trust, will or other governing instrument is to provide
the beneficiary with that degree of use, possession, and enjoyment of
the property during the term of interest that applicable state law
accords to a person who is unqualifiedly designated as a life tenant or
term holder for a similar period of time.
(B) Diversions of income and corpus. A standard section 7520 income
factor for an ordinary income interest may not be used to value an
income interest or similar interest in property for a term of years or
for one or more measuring lives if--
(1) The trust, will, or other governing instrument requires or
permits the beneficiary's income or other enjoyment to be withheld,
diverted, or accumulated for another person's benefit without the
consent of the income beneficiary; or
(2) The governing instrument requires or permits trust corpus to be
withdrawn from the trust for another person's benefit during the income
beneficiary's term of enjoyment without the consent of and
accountability to the income beneficiary for such diversion.
(iii) Remainder and reversionary interests. A standard section 7520
remainder interest factor for an ordinary remainder or reversionary
interest may not be used to determine the present value of a remainder
or reversionary interest (whether in trust or otherwise) unless,
consistent with the preservation and protection that the law of trusts
would provide for a person who is unqualifiedly designated as the
remainder beneficiary of a trust for a similar duration, the effect of
the administrative and dispositive provisions for the interest or
interests that precede the remainder or reversionary interest is to
assure that the property will be adequately preserved and protected
(e.g., from erosion, invasion, depletion, or damage) until the
remainder or reversionary interest takes effect in possession and
enjoyment. This degree of preservation and protection is provided only
if it was the transferor's intent, as manifested by the provisions of
the arrangement and the surrounding circumstances, that the entire
disposition provide the remainder or reversionary beneficiary with an
undiminished interest in the property transferred at the time of the
termination of the prior interest.
(iv) Pooled income fund interests. In general, pooled income funds
are created and administered to achieve a special rate of return. A
beneficial interest in a pooled income fund is not ordinarily valued
using a standard section 7520 income or remainder interest factor. The
present value of a beneficial interest in a pooled income fund is
determined according to rules and special remainder factors prescribed
in Sec. 1.642(c)-6 and, when applicable, the rules set forth in
paragraph (b)(3) of this section, if the individual who is the
measuring life is terminally ill at the time of the transfer.
(3) Mortality component. The mortality component prescribed under
section 7520 may not be used to determine the present value of an
annuity, income interest, remainder interest, or reversionary interest
if an individual who is a measuring life is terminally ill at the time
of the transaction. For purposes of this paragraph (b)(3), an
individual who is known to have an incurable illness or other
deteriorating physical condition is considered terminally ill if there
is at least a 50 percent probability that the individual will die
within 1 year. However, if the individual survives for eighteen months
or longer after the date of the transaction, that individual shall be
presumed to have not been terminally ill at the time of the transaction
unless the contrary is established by clear and convincing evidence.
(4) Examples. The provisions of this paragraph (b) are illustrated
by the following examples:
Example 1. Annuity funded with unproductive property. The
taxpayer transfers corporation stock worth $1,000,000 to a trust.
The trust provides for a 6 percent ($60,000 per year) annuity in
cash or other property to be paid to a charitable organization for
25 years and for the remainder to be distributed to the donor's
child. The trust specifically authorizes, but does not require, the
trustee to retain the shares of stock. The section 7520 interest
rate for the month of the transfer is 8.2 percent. The corporation
has paid no dividends on this stock during the past 5 years, and
there is no indication that this policy will change in the near
future. Under applicable state law, the corporation is considered to
be a sound investment that satisfies fiduciary standards. Therefore,
the trust's sole investment in this corporation is not expected to
adversely affect the interest of either the annuitant or the
remainder beneficiary. Considering the 6 percent annuity payout rate
and the 8.2 percent section 7520 interest rate, the trust corpus is
considered sufficient to pay this annuity for the entire 25-year
term of the trust, or even indefinitely. Although it appears that
neither beneficiary would be able to compel the trustee to make the
trust corpus produce investment income, the annuity interest in this
case is considered to be an ordinary annuity interest, and the
standard section 7520 annuity factor may be used to determine the
present value of the annuity. In this case, the section 7520 annuity
factor would represent the right to receive $1.00 per year for a
term of 25 years.
Example 2. Terminal illness. The taxpayer transfers property
worth $1,000,000 to a charitable remainder unitrust described in
section 664(d)(2) and Sec. 1.664-3. The trust provides for a fixed-
percentage 7 percent unitrust benefit (each annual payment is equal
to 7 percent of the trust assets as valued at the beginning of each
year) to be paid quarterly to an individual beneficiary for life and
for the remainder to be distributed to a charitable organization. At
the time the trust is created, the individual beneficiary is age 60
and has been diagnosed with an incurable illness and there is at
least a 50 percent probability of the individual dying within 1
year. Assuming the presumption in paragraph (b)(3) of this section
does not apply, because there is at least a 50 percent probability
that this beneficiary will die within 1 year, the standard section
7520 unitrust remainder factor for a person age 60 from the
valuation tables may not be used to determine the present value of
the charitable remainder interest. Instead, a special unitrust
remainder factor must be computed that is based on the section 7520
interest rate and that takes into account the projection of the
individual beneficiary's actual life expectancy.
(5) Additional limitations. Section 7520 does not apply to the
extent as may otherwise be provided by the Commissioner.
(c) * * * The provisions of paragraph (b) of this section are
effective with respect to transactions after December 13, 1995.
PART 20--ESTATE TAX; ESTATES OF DECEDENTS DYING AFTER AUGUST 16,
1954
Par. 3. The authority citation for part 20 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 4. Section 20.7520-3 is amended by revising paragraph (b) and
adding a sentence at the end of paragraph (c) to read as follows:
Sec. 20.7520-3 Limitation on the application of section 7520.
* * * * *
(b) Other limitations on the application of section 7520-- (1) In
general--(i) Ordinary beneficial interests. For purposes of this
section:
(A) An ordinary annuity interest is the right to receive a fixed
dollar amount at the end of each year during one or more measuring
lives or for some other defined period. A standard section 7520 annuity
factor for an ordinary annuity
[[Page 63917]]
interest represents the present worth of the right to receive $1.00 per
year for a defined period, using the interest rate prescribed under
section 7520 for the appropriate month. If an annuity interest is
payable more often than annually or is payable at the beginning of each
period, a special adjustment must be made in any computation with a
standard section 7520 annuity factor.
(B) An ordinary income interest is the right to receive the income
from or the use of property during one or more measuring lives or for
some other defined period. A standard section 7520 income factor for an
ordinary income interest represents the present worth of the right to
receive the use of $1.00 for a defined period, using the interest rate
prescribed under section 7520 for the appropriate month.
(C) An ordinary remainder or reversionary interest is the right to
receive an interest in property at the end of one or more measuring
lives or some other defined period. A standard section 7520 remainder
factor for an ordinary remainder or reversionary interest represents
the present worth of the right to receive $1.00 at the end of a defined
period, using the interest rate prescribed under section 7520 for the
appropriate month.
(ii) Certain restricted beneficial interests. A restricted
beneficial interest is an annuity, income, remainder, or reversionary
interest that is subject to any contingency, power, or other
restriction, whether the restriction is provided for by the terms of
the trust, will, or other governing instrument or is caused by other
circumstances. In general, a standard section 7520 annuity, income, or
remainder factor may not be used to value a restricted beneficial
interest. However, a special section 7520 annuity, income, or remainder
factor may be used to value a restricted beneficial interest under some
circumstances. See paragraphs (b)(2)(v) Example 4 and (b)(4) Example 1
of this section, which illustrate situations where special section 7520
actuarial factors are needed to take into account limitations on
beneficial interests. See Sec. 20.7520-1(c) for requesting a special
factor from the Internal Revenue Service.
(iii) Other beneficial interests. If, under the provisions of this
paragraph (b), the interest rate and mortality components prescribed
under section 7520 are not applicable in determining the value of any
annuity, income, remainder, or reversionary interest, the actual fair
market value of the interest (determined without regard to section
7520) is based on all of the facts and circumstances if and to the
extent permitted by the Internal Revenue Code provision applicable to
the property interest.
(2) Provisions of governing instrument and other limitations on
source of payment--(i) Annuities. A standard section 7520 annuity
factor may not be used to determine the present value of an annuity for
a specified term of years or the life of one or more individuals unless
the effect of the trust, will, or other governing instrument is to
ensure that the annuity will be paid for the entire defined period. In
the case of an annuity payable from a trust or other limited fund, the
annuity is not considered payable for the entire defined period if,
considering the applicable section 7520 interest rate at the valuation
date of the transfer, the annuity is expected to exhaust the fund
before the last possible annuity payment is made in full. For this
purpose, it must be assumed that it is possible for each measuring life
to survive until age 110. For example, for a fixed annuity payable
annually at the end of each year, if the amount of the annuity payment
(expressed as a percentage of the initial corpus) is less than or equal
to the applicable section 7520 interest rate at the date of the
transfer, the corpus is assumed to be sufficient to make all payments.
If the percentage exceeds the applicable section 7520 interest rate and
the annuity is for a definite term of years, multiply the annual
annuity amount by the Table B term certain annuity factor, as described
in Sec. 20.7520-1(c)(1), for the number of years of the defined period.
If the percentage exceeds the applicable section 7520 interest rate and
the annuity is payable for the life of one or more individuals,
multiply the annual annuity amount by the Table B annuity factor for
110 years minus the age of the youngest individual. If the result
exceeds the limited fund, the annuity may exhaust the fund, and it will
be necessary to calculate a special section 7520 annuity factor that
takes into account the exhaustion of the trust or fund. This
computation would be modified, if appropriate, to take into account
annuities with different payment terms. See Sec. 25.7520-3(b)(2)(v)
Example 5 of this chapter, which provides an illustration involving an
annuity trust that is subject to exhaustion.
(ii) Income and similar interests--(A) Beneficial enjoyment. A
standard section 7520 income factor for an ordinary income interest may
not be used to determine the present value of an income or similar
interest in trust for a term of years, or for the life of one or more
individuals, unless the effect of the trust, will, or other governing
instrument is to provide the income beneficiary with that degree of
beneficial enjoyment of the property during the term of the income
interest that the principles of the law of trusts accord to a person
who is unqualifiedly designated as the income beneficiary of a trust
for a similar period of time. This degree of beneficial enjoyment is
provided only if it was the transferor's intent, as manifested by the
provisions of the governing instrument and the surrounding
circumstances, that the trust provide an income interest for the income
beneficiary during the specified period of time that is consistent with
the value of the trust corpus and with its preservation. In determining
whether a trust arrangement evidences that intention, the treatment
required or permitted with respect to individual items must be
considered in relation to the entire system provided for in the
administration of the subject trust. Similarly, in determining the
present value of the right to use tangible property (whether or not in
trust) for one or more measuring lives or for some other specified
period of time, the interest rate component prescribed under section
7520 and Sec. 1.7520-1 of this chapter may not be used unless, during
the specified period, the effect of the trust, will or other governing
instrument is to provide the beneficiary with that degree of use,
possession, and enjoyment of the property during the term of interest
that applicable state law accords to a person who is unqualifiedly
designated as a life tenant or term holder for a similar period of
time.
(B) Diversions of income and corpus. A standard section 7520 income
factor for an ordinary income interest may not be used to value an
income interest or similar interest in property for a term of years, or
for one or more measuring lives, if--
(1) The trust, will, or other governing instrument requires or
permits the beneficiary's income or other enjoyment to be withheld,
diverted, or accumulated for another person's benefit without the
consent of the income beneficiary; or
(2) The governing instrument requires or permits trust corpus to be
withdrawn from the trust for another person's benefit without the
consent of the income beneficiary during the income beneficiary's term
of enjoyment and without accountability to the income beneficiary for
such diversion.
(iii) Remainder and reversionary interests. A standard section 7520
remainder interest factor for an ordinary remainder or reversionary
interest may not be used to determine the present
[[Page 63918]]
value of a remainder or reversionary interest (whether in trust or
otherwise) unless, consistent with the preservation and protection that
the law of trusts would provide for a person who is unqualifiedly
designated as the remainder beneficiary of a trust for a similar
duration, the effect of the administrative and dispositive provisions
for the interest or interests that precede the remainder or
reversionary interest is to assure that the property will be adequately
preserved and protected (e.g., from erosion, invasion, depletion, or
damage) until the remainder or reversionary interest takes effect in
possession and enjoyment. This degree of preservation and protection is
provided only if it was the transferor's intent, as manifested by the
provisions of the arrangement and the surrounding circumstances, that
the entire disposition provide the remainder or reversionary
beneficiary with an undiminished interest in the property transferred
at the time of the termination of the prior interest.
(iv) Pooled income fund interests. In general, pooled income funds
are created and administered to achieve a special rate of return. A
beneficial interest in a pooled income fund is not ordinarily valued
using a standard section 7520 income or remainder interest factor. The
present value of a beneficial interest in a pooled income fund is
determined according to rules and special remainder factors prescribed
in Sec. 1.642(c)-6 of this chapter and, when applicable, the rules set
forth under paragraph (b)(3) of this section if the individual who is
the measuring life is terminally ill at the time of the transfer.
(v) Examples. The provisions of this paragraph (b)(2) are
illustrated by the following examples:
Example 1. Unproductive property. A died, survived by B and C. B
died two years after A. A's will provided for a bequest of
corporation stock in trust under the terms of which all of the trust
income was paid to B for life. After the death of B, the trust
terminated and the trust property was distributed to C. The trust
specifically authorized, but did not require, the trustee to retain
the shares of stock. The corporation paid no dividends on this stock
during the 5 years before A's death and the 2 years before B's
death. There was no indication that this policy would change after
A's death. Under applicable state law, the corporation is considered
to be a sound investment that satisfies fiduciary standards. The
facts and circumstances, including applicable state law, indicate
that B did not have the legal right to compel the trustee to make
the trust corpus productive in conformity with the requirements for
a lifetime trust income interest under applicable local law.
Therefore, B's life income interest in this case is considered
nonproductive. Consequently, B's income interest may not be valued
actuarially under this section.
Example 2. Beneficiary's right to make trust productive. The
facts are the same as in Example 1, except that the trustee is not
specifically authorized to retain the shares of stock. Further, the
terms of the trust specifically provide that B, the life income
beneficiary, may require the trustee to make the trust corpus
productive consistent with income yield standards for trusts under
applicable state law. Under that law, the minimum rate of income
that a productive trust may produce is substantially below the
section 7520 interest rate for the month of A's death. In this case,
because B has the right to compel the trustee to make the trust
productive for purposes of applicable local law during the
beneficiary's lifetime, the income interest is considered an
ordinary income interest for purposes of this paragraph, and the
standard section 7520 life income interest factor may be used to
determine the present value of B's income interest.
Example 3. Discretionary invasion of corpus. The decedent, A,
transferred property to a trust under the terms of which all of the
trust income is to be paid to A's child for life and the remainder
of the trust is to be distributed to a grandchild. The trust
authorizes the trustee without restriction to distribute corpus to
A's surviving spouse for the spouse's comfort and happiness. In this
case, because the trustee's power to invade trust corpus is
unrestricted, the exercise of the power could result in the
termination of the income interest at any time. Consequently, the
income interest is not considered an ordinary income interest for
purposes of this paragraph, and may not be valued actuarially under
this section.
Example 4. Limited invasion of corpus. The decedent, A,
bequeathed property to a trust under the terms of which all of the
trust income is to be paid to A's child for life and the remainder
is to be distributed to A's grandchild. The trust authorizes the
child to withdraw up to $5,000 per year from the trust corpus. In
this case, the child's power to invade trust corpus is limited to an
ascertainable amount each year. Annual invasions of any amount would
be expected to progressively diminish the property from which the
child's income is paid. Consequently, the income interest is not
considered an ordinary income interest for purposes of this
paragraph, and the standard section 7520 income interest factor may
not be used to determine the present value of the income interest.
Nevertheless, the present value of the child's income interest is
ascertainable by making a special actuarial calculation that would
take into account not only the initial value of the trust corpus,
the section 7520 interest rate for the month of the transfer, and
the mortality component for the child's age, but also the assumption
that the trust corpus will decline at the rate of $5,000 each year
during the child's lifetime. The child's right to receive an amount
not in excess of $5,000 per year may be separately valued in this
instance and, assuming the trust corpus would not exhaust before the
child would attain age 110, would be considered an ordinary annuity
interest.
Example 5. Power to consume. The decedent, A, devised a life
estate in 3 parcels of real estate to A's surviving spouse with the
remainder to a child, or, if the child doesn't survive, to the
child's estate. A also conferred upon the spouse an unrestricted
power to consume the property, which includes the right to sell part
or all of the property and to use the proceeds for the spouse's
support, comfort, happiness, and other purposes. Any portion of the
property or its sale proceeds remaining at the death of the
surviving spouse is to vest by operation of law in the child at that
time. The child predeceased the surviving spouse. In this case, the
surviving spouse's power to consume the corpus is unrestricted, and
the exercise of the power could entirely exhaust the remainder
interest during the life of the spouse. Consequently, the remainder
interest that is includible in the child's estate is not considered
an ordinary remainder interest for purposes of this paragraph and
may not be valued actuarially under this section.
(3) Mortality component--(i) Terminal illness. Except as provided
in paragraph (b)(3)(ii) of this section, the mortality component
prescribed under section 7520 may not be used to determine the present
value of an annuity, income interest, remainder interest, or
reversionary interest if an individual who is a measuring life is
terminally ill at the time of the decedent's death. For purposes of
this paragraph (b)(3), an individual who is known to have an incurable
illness or other deteriorating physical condition is considered
terminally ill if there is at least a 50 percent probability that the
individual will die within 1 year. However, if the individual survives
for eighteen months or longer after the date of the decedent's death,
that individual shall be presumed to have not been terminally ill at
the date of death unless the contrary is established by clear and
convincing evidence.
(ii) Terminal illness exceptions. In the case of the allowance of
the credit for tax on a prior transfer under section 2013, if a final
determination of the federal estate tax liability of the transferor's
estate has been made under circumstances that required valuation of the
life interest received by the transferee, the value of the property
transferred, for purposes of the credit allowable to the transferee's
estate, shall be the value determined previously in the transferor's
estate. Otherwise, for purposes of section 2013, the provisions of
paragraph (b)(3)(i) of this section shall govern in valuing the
property transferred. The value of a decedent's reversionary interest
under sections 2037(b) and 2042(2) shall be determined without regard
to the physical condition, immediately before the decedent's death, of
the individual who is the measuring life.
[[Page 63919]]
(iii) Death resulting from common accidents. The mortality
component prescribed under section 7520 may not be used to determine
the present value of an annuity, income interest, remainder interest,
or reversionary interest if the decedent, and the individual who is the
measuring life, die as a result of a common accident or other
occurrence.
(4) Examples. The provisions of paragraph (b)(3) of this section
are illustrated by the following examples:
Example 1. Terminal illness. The decedent bequeaths $1,000,000
to a trust under the terms of which the trustee is to pay $103,000
per year to a charitable organization during the life of the
decedent's child. Upon the death of the child, the remainder in the
trust is to be distributed to the decedent's grandchild. The child,
who is age 60, has been diagnosed with an incurable illness, and
there is at least a 50 percent probability of the child dying within
1 year. Assuming the presumption provided for in paragraph (b)(3)(i)
of this section does not apply, the standard life annuity factor for
a person age 60 may not be used to determine the present value of
the charitable organization's annuity interest because there is at
least a 50 percent probability that the child, who is the measuring
life, will die within 1 year. Instead, a special section 7520
annuity factor must be computed that takes into account the
projection of the child's actual life expectancy.
Example 2. Deaths resulting from common accidents, etc. The
decedent's will establishes a trust to pay income to the decedent's
surviving spouse for life. The will provides that, upon the spouse's
death or, if the spouse fails to survive the decedent, upon the
decedent's death the trust property is to pass to the decedent's
children. The decedent and the decedent's spouse die simultaneously
in an accident under circumstances in which it was impossible to
determine who survived the other. Even if the terms of the will and
applicable state law presume that the decedent died first with the
result that the property interest is considered to have passed in
trust for the benefit of the spouse for life, after which the
remainder is to be distributed to the decedent's children, the
spouse's life income interest may not be valued by use of the
mortality component described under section 7520. The result would
be the same even if it was established that the spouse survived the
decedent.
(5) Additional limitations. Section 7520 does not apply to the
extent as may otherwise be provided by the Commissioner.
(c) * * * The provisions of paragraph (b) of this section are
effective with respect to estates of decedents dying after December 13,
1995.
PART 25--GIFT TAX; GIFTS MADE AFTER DECEMBER 31, 1954
Par. 5. The authority citation for part 25 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *.
Par. 6. In the list below, for each section indicated in the left
column, remove the language in the middle column and add the language
in the right column:
----------------------------------------------------------------------------------------------------------------
Section Remove Add
----------------------------------------------------------------------------------------------------------------
25.2522(c)-3(c)(2)(i) 6th (e)(2) (ii), (iii), (c)(2) (ii), (iii), and (iv).
sentence. and (iv).
25.2522(c)-3(c)(2) (vi)(a) 2nd Subdivision (v)....... Paragraph (c)(2)(vi).
sentence.
25.2522(c)-3(c)(2) (vii)(a) 2nd Subdivision (vi)...... Paragraph (c)(2)(vii).
sentence.
25.2522(c)-3(d)(2) introductory Subdivision (iv), (v), Paragraph (c)(2) (v), (vi), or (vii).
text. or (vi) of paragraph
(c)(2).
25.2522(c)-3(d)(2) (iv) 1st Paragraph (c)(2)(v)... Paragraph (c)(2)(vi).
sentence.
25.2522(c)-3(d)(2)(iv), Example Paragraph (c)(2)(v)... Paragraph (c)(2)(vi).
(1) 1st sentence.
25.2522(c)-3(d)(2)(iv), Example Paragraph (c)(2)(v)... Paragraph (c)(2)(vi).
(2) 1st sentence.
25.2522(c)-3(d)(2)(iv), Example Paragraph (c)(2)(v)... Paragraph (c)(2)(vi).
(3) 1st sentence (each place
it appears).
25.2522(c)-3(d)(2)(iv), Example Paragraph (c)(2)(v)(e) Paragraph (c)(2)(vi)(e)
(4) last sentence.
25.2522(c)-3(d)(2)(v).......... Paragraph (c)(2)(vi).. Paragraph (c)(2)(vii).
----------------------------------------------------------------------------------------------------------------
Par. 7. Section 25.7520-3 is amended by revising paragraph (b) and
adding a sentence at the end of paragraph (c) to read as follows:
Sec. 25.7520-3 Limitation on the application of section 7520.
* * * * *
(b) Other limitations on the application of section 7520--(1) In
general--(i) Ordinary beneficial interests. For purposes of this
section:
(A) An ordinary annuity interest is the right to receive a fixed
dollar amount at the end of each year during one or more measuring
lives or for some other defined period. A standard section 7520 annuity
factor for an ordinary annuity interest represents the present worth of
the right to receive $1.00 per year for a defined period, using the
interest rate prescribed under section 7520 for the appropriate month.
If an annuity interest is payable more often than annually or is
payable at the beginning of each period, a special adjustment must be
made in any computation with a standard section 7520 annuity factor.
(B) An ordinary income interest is the right to receive the income
from or the use of property during one or more measuring lives or for
some other defined period. A standard section 7520 income factor for an
ordinary income interest represents the present worth of the right to
receive the use of $1.00 for a defined period, using the interest rate
prescribed under section 7520 for the appropriate month. However, in
the case of certain gifts made after October 8, 1990, if the donor does
not retain a qualified annuity, unitrust, or reversionary interest, the
value of any interest retained by the donor is considered to be zero if
the remainder beneficiary is a member of the donor's family. See
Sec. 25.2702-2.
(C) An ordinary remainder or reversionary interest is the right to
receive an interest in property at the end of one or more measuring
lives or some other defined period. A standard section 7520 remainder
factor for an ordinary remainder or reversionary interest represents
the present worth of the right to receive $1.00 at the end of a defined
period, using the interest rate prescribed under section 7520 for the
appropriate month.
(ii) Certain restricted beneficial interests. A restricted
beneficial interest is an annuity, income, remainder, or reversionary
interest that is subject to any contingency, power, or other
restriction, whether the restriction is provided for by the terms of
the trust, will, or other governing instrument or is caused by other
circumstances. In general, a standard section 7520 annuity, income, or
remainder factor may not be used to value a restricted beneficial
interest. However, a special section 7520 annuity, income, or remainder
factor may be used to value a restricted beneficial interest under some
circumstances. See paragraphs
[[Page 63920]]
(b)(2)(v) Example 5 and (b)(4) of this section, which illustrate
situations in which special section 7520 actuarial factors are needed
to take into account limitations on beneficial interests. See
Sec. 25.7520-1(c) for requesting a special factor from the Internal
Revenue Service.
(iii) Other beneficial interests. If, under the provisions of this
paragraph (b), the interest rate and mortality components prescribed
under section 7520 are not applicable in determining the value of any
annuity, income, remainder, or reversionary interest, the actual fair
market value of the interest (determined without regard to section
7520) is based on all of the facts and circumstances if and to the
extent permitted by the Internal Revenue Code provision applicable to
the property interest.
(2) Provisions of governing instrument and other limitations on
source of payment--(i) Annuities. A standard section 7520 annuity
factor may not be used to determine the present value of an annuity for
a specified term of years or the life of one or more individuals unless
the effect of the trust, will, or other governing instrument is to
ensure that the annuity will be paid for the entire defined period. In
the case of an annuity payable from a trust or other limited fund, the
annuity is not considered payable for the entire defined period if,
considering the applicable section 7520 interest rate on the valuation
date of the transfer, the annuity is expected to exhaust the fund
before the last possible annuity payment is made in full. For this
purpose, it must be assumed that it is possible for each measuring life
to survive until age 110. For example, for a fixed annuity payable
annually at the end of each year, if the amount of the annuity payment
(expressed as a percentage of the initial corpus) is less than or equal
to the applicable section 7520 interest rate at the date of the
transfer, the corpus is assumed to be sufficient to make all payments.
If the percentage exceeds the applicable section 7520 interest rate and
the annuity is for a definite term of years, multiply the annual
annuity amount by the Table B term certain annuity factor, as described
in Sec. 25.7520-1(c)(1), for the number of years of the defined period.
If the percentage exceeds the applicable section 7520 interest rate and
the annuity is payable for the life of one or more individuals,
multiply the annual annuity amount by the Table B annuity factor for
110 years minus the age of the youngest individual. If the result
exceeds the limited fund, the annuity may exhaust the fund, and it will
be necessary to calculate a special section 7520 annuity factor that
takes into account the exhaustion of the trust or fund. This
computation would be modified, if appropriate, to take into account
annuities with different payment terms.
(ii) Income and similar interests--(A) Beneficial enjoyment. A
standard section 7520 income factor for an ordinary income interest is
not to be used to determine the present value of an income or similar
interest in trust for a term of years or for the life of one or more
individuals unless the effect of the trust, will, or other governing
instrument is to provide the income beneficiary with that degree of
beneficial enjoyment of the property during the term of the income
interest that the principles of the law of trusts accord to a person
who is unqualifiedly designated as the income beneficiary of a trust
for a similar period of time. This degree of beneficial enjoyment is
provided only if it was the transferor's intent, as manifested by the
provisions of the governing instrument and the surrounding
circumstances, that the trust provide an income interest for the income
beneficiary during the specified period of time that is consistent with
the value of the trust corpus and with its preservation. In determining
whether a trust arrangement evidences that intention, the treatment
required or permitted with respect to individual items must be
considered in relation to the entire system provided for in the
administration of the subject trust. Similarly, in determining the
present value of the right to use tangible property (whether or not in
trust) for one or more measuring lives or for some other specified
period of time, the interest rate component prescribed under section
7520 and Sec. 1.7520-1 of this chapter may not be used unless, during
the specified period, the effect of the trust, will or other governing
instrument is to provide the beneficiary with that degree of use,
possession, and enjoyment of the property during the term of interest
that applicable state law accords to a person who is unqualifiedly
designated as a life tenant or term holder for a similar period of
time.
(B) Diversions of income and corpus. A standard section 7520 income
factor for an ordinary income interest may not be used to value an
income interest or similar interest in property for a term of years, or
for one or more measuring lives, if--
(1) The trust, will, or other governing instrument requires or
permits the beneficiary's income or other enjoyment to be withheld,
diverted, or accumulated for another person's benefit without the
consent of the income beneficiary; or
(2) The governing instrument requires or permits trust corpus to be
withdrawn from the trust for another person's benefit without the
consent of the income beneficiary during the income beneficiary's term
of enjoyment and without accountability to the income beneficiary for
such diversion.
(iii) Remainder and reversionary interests. A standard section 7520
remainder interest factor for an ordinary remainder or reversionary
interest may not be used to determine the present value of a remainder
or reversionary interest (whether in trust or otherwise) unless,
consistent with the preservation and protection that the law of trusts
would provide for a person who is unqualifiedly designated as the
remainder beneficiary of a trust for a similar duration, the effect of
the administrative and dispositive provisions for the interest or
interests that precede the remainder or reversionary interest is to
assure that the property will be adequately preserved and protected
(e.g., from erosion, invasion, depletion, or damage) until the
remainder or reversionary interest takes effect in possession and
enjoyment. This degree of preservation and protection is provided only
if it was the transferor's intent, as manifested by the provisions of
the arrangement and the surrounding circumstances, that the entire
disposition provide the remainder or reversionary beneficiary with an
undiminished interest in the property transferred at the time of the
termination of the prior interest.
(iv) Pooled income fund interests. In general, pooled income funds
are created and administered to achieve a special rate of return. A
beneficial interest in a pooled income fund is not ordinarily valued
using a standard section 7520 income or remainder interest factor. The
present value of a beneficial interest in a pooled income fund is
determined according to rules and special remainder factors prescribed
in Sec. 1.642(c)-6 of this chapter and, when applicable, the rules set
forth under paragraph (b)(3) of this section if the individual who is
the measuring life is terminally ill at the time of the transfer.
(v) Examples. The provisions of this paragraph (b)(2) are
illustrated by the following examples:
Example 1. Unproductive property. The donor transfers
corporation stock to a trust under the terms of which all of the
trust income is payable to A for life. Considering the applicable
federal rate under section 7520 and the appropriate life estate
factor for a person A's age, the value of A's income interest, if
valued under this section, would
[[Page 63921]]
be $10,000. After A's death, the trust is to terminate and the trust
property is to be distributed to B. The trust specifically
authorizes, but does not require, the trustee to retain the shares
of stock. The corporation has paid no dividends on this stock during
the past 5 years, and there is no indication that this policy will
change in the near future. Under applicable state law, the
corporation is considered to be a sound investment that satisfies
fiduciary standards. The facts and circumstances, including
applicable state law, indicate that the income beneficiary would not
have the legal right to compel the trustee to make the trust corpus
productive in conformity with the requirements for a lifetime trust
income interest under applicable local law. Therefore, the life
income interest in this case is considered nonproductive.
Consequently, A's income interest may not be valued actuarially
under this section.
Example 2. Beneficiary's right to make trust productive. The
facts are the same as in Example 1, except that the trustee is not
specifically authorized to retain the shares of corporation stock.
Further, the terms of the trust specifically provide that the life
income beneficiary may require the trustee to make the trust corpus
productive consistent with income yield standards for trusts under
applicable state law. Under that law, the minimum rate of income
that a productive trust may produce is substantially below the
section 7520 interest rate on the valuation date. In this case,
because A, the income beneficiary, has the right to compel the
trustee to make the trust productive for purposes of applicable
local law during A's lifetime, the income interest is considered an
ordinary income interest for purposes of this paragraph, and the
standard section 7520 life income factor may be used to determine
the value of A's income interest. However, in the case of gifts made
after October 8, 1990, if the donor was the life income beneficiary,
the value of the income interest would be considered to be zero in
this situation. See Sec. 25.2702-2.
Example 3. Annuity trust funded with unproductive property. The
donor, who is age 60, transfers corporation stock worth $1,000,000
to a trust. The trust will pay a 6 percent ($60,000 per year)
annuity in cash or other property to the donor for 10 years or until
the donor's prior death. Upon the termination of the trust, the
trust property is to be distributed to the donor's child. The
section 7520 rate for the month of the transfer is 8.2 percent. The
corporation has paid no dividends on the stock during the past 5
years, and there is no indication that this policy will change in
the near future. Under applicable state law, the corporation is
considered to be a sound investment that satisfies fiduciary
standards. Therefore, the trust's sole investment in this
corporation is not expected to adversely affect the interest of
either the annuity beneficiary or the remainder beneficiary.
Considering the 6 percent annuity payout rate and the 8.2 percent
section 7520 interest rate, the trust corpus is considered
sufficient to pay this annuity for the entire 10-year term of the
trust, or even indefinitely. The trust specifically authorizes, but
does not require, the trustee to retain the shares of stock.
Although it appears that neither beneficiary would be able to compel
the trustee to make the trust corpus produce investment income, the
annuity interest in this case is considered to be an ordinary
annuity interest, and a section 7520 annuity factor may be used to
determine the present value of the annuity. In this case, the
section 7520 annuity factor would represent the right to receive
$1.00 per year for a term of 10 years or the prior death of a person
age 60.
Example 4. Unitrust funded with unproductive property. The facts
are the same as in Example 3, except that the donor has retained a
unitrust interest equal to 7 percent of the value of the trust
property, valued as of the beginning of each year. Although the
trust corpus is nonincome-producing, the present value of the
donor's retained unitrust interest may be determined by using the
section 7520 unitrust factor for a term of years or a prior death.
Example 5. Eroding corpus in an annuity trust. (i) The donor,
who is age 60 and in normal health, transfers property worth
$1,000,000 to a trust. The trust will pay a 10 percent ($100,000 per
year) annuity to a charitable organization for the life of the
donor, payable annually, and the remainder will be distributed to
the donor's child. The section 7520 rate for the month of the
transfer is 6.8 percent. First, it is necessary to determine whether
the annuity may exhaust the corpus before all annuity payments are
made. Because it is assumed that any measuring life may survive
until age 110, any life annuity could require payments until the
measuring life reaches age 110. Based on a section 7520 interest
rate of 6.8 percent, the determination of whether the annuity may
exhaust the corpus before the annuity payments are made is computed
as follows:
Age to which life annuity may continue................ 110
Less: Age of measuring life at date of transfer....... 60
-----------------
Number of years annuity may continue............ 50
Annual annuity payment................................ $100,000.00
Times: Table B annuity factor for 50 years............ 14.1577
-----------------
Present value of term certain annuity........... 1,415,770.00
(ii) Since the present value of an annuity for a term of 50
years exceeds the corpus, the annuity may exhaust the trust before
all payments are made. Consequently, the annuity must be valued as
an annuity payable for a term of years or until the prior death of
the annuitant, with the term of years determined by when the fund
will be exhausted by the annuity payments.
(iii) Using factors based on Table 80CNSMT at 6.8 percent, it is
determined that the fund will be sufficient to make 17 annual
payments, but not to make the entire 18th payment. Specifically, the
initial corpus will be able to make payments of $67,287.26 per year
for 17 years plus payments of $32,712.74 per year for 18 years. The
annuity is valued by adding the value of the two separate temporary
annuities.
(iv) Based on Table H of Publication 1457 (a copy of this
publication may be purchased from the Superintendent of Documents,
United States Government Printing Office, Washington, DC 20402), the
present value of an annuity of $67,287.26 per year payable for 17
years or until the prior death of a person aged 60 is $579,484.61
($67,287.26 x 8.6121). The present value of an annuity of
$32,712.74 per year payable for 18 years or until the prior death of
a person aged 60 is $287,731.45 ($32,712.74 x 8.7957). Thus, the
present value of the charitable annuity interest is $867,216.06
($579,484.61 + $287,731.45).
(3) Mortality component. The mortality component prescribed under
section 7520 may not be used to determine the present value of an
annuity, income interest, remainder interest, or reversionary interest
if an individual who is a measuring life dies or is terminally ill at
the time the gift is completed. For purposes of this paragraph (b)(3),
an individual who is known to have an incurable illness or other
deteriorating physical condition is considered terminally ill if there
is at least a 50 percent probability that the individual will die
within 1 year. However, if the individual survives for eighteen months
or longer after the date the gift is completed, that individual shall
be presumed to have not been terminally ill at the date the gift was
completed unless the contrary is established by clear and convincing
evidence.
(4) Example. The provisions of paragraph (b)(3) of this section are
illustrated by the following example:
Example. Terminal illness. The donor transfers property worth
$1,000,000 to a child in exchange for the child's promise to pay the
donor $103,000 per year for the donor's life. The donor is age 60
but has been diagnosed with an incurable illness and has at least a
50 percent probability of dying within 1 year. The section 7520
interest rate for the month of the transfer is 10.6 percent, and the
standard annuity factor at that interest rate for a person age 60 in
normal health is 7.4230. Thus, if the donor were not terminally ill,
the present value of the
[[Page 63922]]
annuity would be $764,569 ($103,000 x 7.4230). Assuming the
presumption provided in paragraph (b)(3) of this section does not
apply, because there is at least a 50 percent probability that the
donor will die within 1 year, the standard section 7520 annuity
factor may not be used to determine the present value of the donor's
annuity interest. Instead, a special section 7520 annuity factor
must be computed that takes into account the projection of the
donor's actual life expectancy.
(5) Additional limitations. Section 7520 does not apply to the
extent as may otherwise be provided by the Commissioner.
(c) * * * The provisions of paragraph (b) of this section are
effective with respect to gifts made after December 13, 1995.
Michael P. Dolan,
Acting Commissioner of Internal Revenue.
Approved: October 29, 1995.
Leslie Samuels,
Assistant Secretary of the Treasury.
[FR Doc. 95-30272 Filed 12-12-95; 8:45 am]
BILLING CODE 4830-01-U
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.