IRS Annuity Factor Method

The IRS Annuity Factor Method is the method the IRS used in §7520-3(b)(2)(v), Example 5. This method finds the highest term that yields a term-certain annuity value less than the initial value of the trust. This term is equal to the number of years that full payments last. Repeating this technique for the number of periods in the final year gives us the number of periods in the final year which have full payments.

Once the term of the trust is known, the term certain annuity factors are used to calculate the value of the final annuity:

1) Calculate Term Certain Annuity Factors:

Factor for 16½ years = (½ x 9.5731) + (½ x 9.8999) = 9.7365

Factor for 16¾ years = (¼ x 9.5731) + (¾ x 9.8999) = 9.8182

2) Adjust Annuity Factors for Frequency of Payments:

9.7365 x 1.0252 = 9.9818598

9.8182 x 1.0252 = 10.06561864

3) Calculate the annuity which corresponds to the final payment:

Annuity =($1,000,000 - ($100,000 x 9.9818598) ) / (10.06561864 – 9.9818598) = $21,657.65

4) To transform this annuity into a single payment, divide by the number of payments per year:

Final Payment = $21,657.65 / 4 = $5,414.41