Overview

Main Menu Name: Cont Rev.

This module calculates the present value of a contingent reversion (the present value being a percentage of the value of the trust or the relevant portion of the trust), given the age of the grantor, the ages of up to five beneficiaries who must die before the grantor receives the reversion, and the discount rate under section 7520 of the Internal Revenue Code (which is 120% of the applicable federal mid-term rate, rounded to the nearest two-tenths of a percent). The reversion is calculated in the same way as a remainder following a simple income interest, without regard to any possible principal distributions or any income accumulations.

In this article:

• Background
• Getting Started
• Entering Data
• Results

Background

The calculations are displayed in two columns, one showing the consequences of a bypass trust created at the first death to use the unified credit of the first to die, and one showing the entire combined estates passing to the survivor.

The amount passing to the bypass trust at the first death is calculated by taking the applicable exclusion amount for that year and deducting the amount of any adjusted taxable gifts entered other than gifts which resulted in the payment of gift tax.

For the bypass trust column, the survivor's taxable estate is the net value of the combined estates entered, less the amount passing into the bypass trust at the first death. For the "all to spouse" column, the survivor's taxable estate is the entire net value of the combined estates entered. In both columns, the growth rate that was entered is compounded annually to increase the surviving spouse's estate (and the bypass trust) from the first death to the second death.

The estate tax for the survivor's estate is calculated using the exclusion amount for the year of the second death (including any inflation adjustments after 2011) and, in the "All to Spouse" column, the "deceased spousal unused exclusion amount" (DSUEA) if the first death is after 2010. The DSUEA is the exclusion amount at the first death, less the amount of any adjusted taxable gifts entered for the first death including gifts which resulted in the payment of gift tax. In both columns, the adjusted taxable gifts are added to the taxable estate and the tentative tax on that sum is reduced by both the amount entered for the gift tax paid and the credit amount based on the applicable exclusion.

For simplicity, not all possible credits are calculated in the calculation' results. The purpose of this calculation is to produce a quick estimate of the potential federal estate tax.

The amount of the taxes saved by the bypass trust is the difference between the total federal and state estate taxes in the two columns.

Although the DSUEA was enacted in order to allow the estate of the surviving spouse to have the benefit of the unified credits of both spouses without the use of a bypass trust, the bypass trust may still result in lower taxes at the second death due to (a) growth in the value of assets after the first death which can be excluded from the estate of the surviving spouse through the bypass trust but not through the use of the DSUEA, and (b) the possible reduction in the DSUEA by adjusted taxable gifts on which gift tax was paid.

Getting Started

The grantor of a trust (or other similar beneficial interests in property) will sometimes retain the right to receive back the property in the trust if all of the beneficiaries should die and the grantor is still living. The possibility of that kind of "contingent reversion" would exist if, for example, the grantor has given property in trust for the benefit of a child and directed that the trust distribute income to the child for life and then distribute the trust property to the child's children (the grantor's grandchildren) when the child dies, and the grantor has directed that the trust property return to the grantor if the child dies without any grandchildren surviving her and the grantor is still living, but that the trust property go to the grantor's intestate heirs if the grantor is not then living.

A contingent reversion can have federal estate tax or federal income tax consequences if the present value of the contingent reversion is more than 5% of the value of the trust.

1. Under section 2037(a) of the Internal Revenue Code, the entire value of a trust is included in the grantor's gross estate for federal estate tax purposes if (1) possession or enjoyment of the trust property is contingent on surviving the grantor, and (2) the value of the grantor's possible reversionary interest is more than 5 percent of the value of the trust immediately before the grantor's death.
2. Under section 673(a) of the Internal Revenue Code, the grantor of a tris treated as the owner of any portion of the income or principal of a trust (which means that the income from that portion of the trust is taxed to the grantor and not the trust) in which the grantor has a reversionary interest with a value of more than 5 percent of the value of that portion of he trust.

Entering Data

To calculate the present value of a reversionary interest retained by a grantor that is contingent upon the grantor surviving one or more beneficiaries, enter the following information.

1. Transfer Date:  Enter the month and year to be used for the valuation, which would be the date of death for a valuation for estate tax purposes.
2. §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.
3. Age of Grantor:  Enter the age of the grantor as of the grantor's nearest birthday.
4. Number of Beneficiaries:  Enter the number of beneficiaries that the grantor must survive in order to receive back the reversionary interest.
5. Ages of Beneficiaries:  Enter the age of each beneficiary as of the beneficiary's nearest birthday.

Results

The program calculates the present value of the grantor's contingent reversion, as well as the probability of the reversion.

The probability of the reversion is the probability that the grantor will survive all of the beneficiaries, which is the probability that the grantor will receive anything. The difference between the probability of reversion and the present value of the the reversion is that the present value takes into account the number of years that might elapse before the reversion is received and the income that could be earned during that period.

The calculation is similar to the calculation of a remainder following a life estate, and does not take into account the possibility of distributions of principal or capital growth of principal.