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How to Correctly Determine Annuity’s Present Value

How to Correctly Determine Annuity’s Present Value

Avoid a common error when using IRS actuarial tables

Determining the age of an individual is straightforward, except when using standard actuarial tables for tax purposes.

Practitioners must use nearest age (that is, the age of the individual at his nearest birthday), not attained age, when determining the present value of an annuity, an interest for life or for a term of years or a remainder or a reversionary interest under Internal Revenue Code Section 7520.  For example, IRC Section 7520 actuarial factors are needed to value income and remainder interests in property.  The factors are also used to value gifts to charitable remainder annuity trusts, charitable remainder unitrusts (CRUTs), pooled income funds, charitable remainders in certain real estate, qualified personal residence trusts, grantor retained annuity trusts, private annuities and sales involving self-cancelling installment notes.

Why It’s Important

Using the nearest age instead of attained age can change the value of a tax-deductible gift to a charity or trust.  For example, President Barack Obama’s birth certificate (long form) shows he was born on Aug. 4, 1961.  If President Obama makes a gift to a CRUT that will benefit a qualifying charity at the end of his life, he’ll need to determine the actuarial value of the remainder interest for purposes of claiming his charitable income tax deduction.  Actuarial tables under IRC Section 7520 provide the required standard factor for determining the value of a remainder interest in a CRUT.  If he makes his gift on Feb. 3, 2013, his nearest age will be 52, the same as his actual age.  But, if he makes that same gift a day later, on Feb. 4, 2013, his nearest age will be 53, while his actual age remains 52.  That addition of one year to his age will increase the value of his tax-deductible gift to charity.

Authority For the Rule

Unfortunately, the nearest age requirement is missing from Internal Revenue Service publications 1457, 1458 and 1459 (all contain examples of how to use various IRS actuarial tables).  It’s not in any of the Section 7520 regulations, either.  The nearest age requirement is found in Estate Tax Regulation Section 20.2031-7(d)(1), relating to actuarial valuations on or after May 1, 2009.  That section says that if the valuation date for the gross estate of a decedent is on or after May 1, 2009, the fair market value of annuities, life estates, terms of years, remainders and reversionary interests is the present value determined by use of standard or special Section 7520 actuarial factors.  It goes on to say, “For purposes of the computations described in this section, the age of an individual is the age of that individual at the individual's nearest birthday.”

The Section 7520 regulations under the income tax, estate tax and gift tax all generally direct the reader to Estate Tax Regulation Section 20.2031-7(d) (and, for periods prior to May 1, 2009, Section 20.2031-7A) for the computation of the value of annuities, unitrust interests, life estates, terms for years, remainders and reversions.  That means nearest age is used under all Section 7520 and related regulations, not just for estate tax computations.

Though not authority, the help features of several top actuarial software applications also instruct users to enter nearest age.

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