Annuity and Life Estate Factors (Factors)

[Kathleen Reynolds]

#2409

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Performs annuity, life estate and remainder calculations for term, or one to three lives.

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.

Entering Data

1. Select the button for the calculation you want to perform (Annuity Factors or Life Estate & Remainder):
2. Transfer Date Enter the month and year (dd/yyyy). See Transition Period Notes.
3. §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.
4. 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.
5. 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.
6. 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.
7. 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).
8. 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.
9. 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.

Results

Annuity Factors
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.

Factors

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.

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