Main Menu Name: Factors
Performs annuity, life estate and remainder calculations for term, or one to three lives.
In this article:
For income, estate, or gift tax planning purposes, or for general financial planning purposes, it is often necessary to know the present value of a continuing series of payments to be received in the future. When the payments are regular and fixed in amount, they can be valued as an annuity.
The two simplest forms of annuities are annuities payable for a term of years and annuities payable for a life (or lives). There are also many possible variations, such as annuities payable for the shorter of a term or life, annuities with a guaranteed term (i.e., payable for the longer of a term or life), annuities that terminate upon the first death among several lives (instead of last-to-die), and deferred annuities that start at a future date. This program calculates only annuities for a term, for a life (or up to three joint lives), or the shorter of a term or life (or lives).
The present value of an annuity is usually determined by multiplying the total annual payments by a factor. When the annuity is payable annually and at the end of each year, the factor is nothing but the comparable life estate factor (see the Life Estate and Remainders Factors explanation below), divided by the assumed discount rate (i.e., the section 7520 rate). When annuities are payable semi-annually, quarterly, or monthly, or at the beginning of each payment period instead of at the end, the base factor must be adjusted.
The factors calculated by this program are based on rules and regulations under Section 7520 of the Internal Revenue Code, and methods used by the IRS consistent with those rules and regulations. This means that future values are discounted to present values using the interest rate required under Section 7520 (120% of the federal mid-term rate for the month, rounded to the nearest 2/10ths of a percent) and using Table 80CNSMT, Table 90CM, or Table 2000CM mortality values.
Life Estate and Remainder Factors
A term of years is the right to use, possess, and enjoy the property or the income it produces for a specified number of years. That right continues until the term expires (regardless of whether or not the person enjoying the property or the income it produces during that term continues to live. If the "term tenant" dies, the right can be left by will or passed to a family member through intestacy laws).
A life estate is the right to use, possess, and enjoy property or the income it produces for the life of a specified person. That measuring life (using age nearest birthday) can be the life of the holder of the interest or may be measured by the life of some other person (a so called "estate per autre vie").
A life estate can be payable for more than one life. For example, the right to live on or enjoy the income from property (in or out of trust) can extend for joint lives of you and your spouse or you and any other person or persons. Note that the life income beneficiary receives no right to enjoy the principal and the life estate therefore ends at the death of the "measuring life." But if one person holds a life estate (e.g. a parent) and another person is used as the measuring life (e.g., a child), the holder of the estate could give it away, sell it, or leave it in his or her will and it will continue in the new owner's hands - until the death of the measuring life.
A remainder interest is the right to use, possess, or enjoy property when the prior interest (term or life) ends. Mathematically, the value of a remainder interest is found by subtracting the present value of the prior interest from the entire fair market value of the property.
Terms of years, life estates, and remainder interests are key estate planning concepts. To make these time value of money computations, you must use a discount rate issued monthly by the federal government called the "Section 7520 rate." This is computed from the average market yield of U.S. obligations.
The calculations performed by this part of the program result in factors that are the same as in the IRS Aleph Volume. Such factors are used for various tax purposes including federal estate tax valuations.
Select the button for the calculation you want to perform (Annuity Factors or Life Estate & Remainder):
- Transfer Date: Enter the month and year (dd/yyyy).
Note: For May or June of 2009, you have the choice of using mortality Table 90CM or 2000CM (see http://www.irs.gov/retirement/article/0,,id=206601,00.html). After June 2009, the program will automatically use Table 2000CM. For dates before May 2009 and after June 1999, the program will use Table 90CM. For May or June of 1999, you have the choice of using Table 80CNSMT or Table 90CM. For dates before May 1999 and after April 1989, the program will automatically use Table 80CNSMT. For dates before May 1989, the program uses Table LN from Treas. Reg. section 20.2031-7A(d)(6).
- §7520 Rate: The program automatically enters the correct §7520 discount rate if you have kept the AFR Rates Manager up-to-date. If the AFR Rates Manager is not up-to-date, the program shows a 30% value for the selected transfer date. The program automatically rounds the rate to the nearest 2/10 of 1% as required under §7520.
- Calculation Type: Select a calculation type (Term, Life or Shorter). Depending on the type of calculation type you choose the following entry fields may or may not need to be filled out.
- Lives: This entry field appears when Life or Shorter is selected as the Calculation Type. Enter the number of lives the calculation is based on. The program handles up to three lives.
- Ages: This entry field appears when Greater, Shorter, One Life, Joint Life, or First-To-Die is the selected Calculation Type. Enter the age (or ages) as of the birthday nearest to the valuation date. This entry field is not available for Term calculations.
- Term: This entry field appears when Term or Shorter is selected as the Calculation Type. Enter the number of years the term will last (1-99 years).
- Aggregate Annual Payments/Principal: For annuity calculations, enter the total of the payments to be made each year. (For example: enter $12,000 for monthly payments of $1,000 each.) For life estate and remainder calculations, enter the fair market value of the principal that is subject to the life estate.
- Payment Timing: For annuity calculations, select Begin or End to indicate when the payment should be made for the selected payment period. This helps to determine what payout frequency factor is used in the calculation.
The present value of the annuity is determined by multiplying the annual payments by a factor, calculated as follows.
- The program first calculates a base factor based on the age or ages (for an annuity for life), term of years (for an annuity for a term), or the term and age or ages (for an annuity for the shorter of a term and life).
- The program also calculates frequency adjustment factors for semiannual, quarterly, monthly, and weekly payments. When the annuity is for a term, the frequency adjustment factor will be from Schedule K of Treas. Reg. §20.2031-7 when the annuity is payable at the end of each period and from Schedule J of that regulation when the annuity is payable at the beginning of each period. For life calculations, and the shorter of term or life, the frequency adjustment factor is from Schedule K. When an annuity for life is payable at the beginning of each period, the value of the annuity is increased by adding the value of the first payment.
For life estate and remainder calculations, the program calculates the relevant factors and then multiplies those factors by the principal amount to determine the value of each interest.
The remainder factor does not include any allowance for depreciation, and is therefore not suitable for valuing a charitable remainder in a personal residence. See Treas. Reg. §1.170A-12.