Contingent Reversion

[Kathleen Reynolds]

#2486

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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.

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

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. See Transition Period Notes below
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.

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IMPORTANT NOTE: Mortality table 2010CM was included in version 2022.20 of the software. Table 2010CM reflects longer life expectancies than table 2000CM, and will generally result in life interests worth more, while remainder interests worth less. Once finalized, the new 2010CM table will go in effect on the first day of the first month after regulations have been finalized. If you have a prior version of the software, its advised to update to the latest version before the transition period ends (see below).

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Mortality Table Transition Periods

For Transfer Dates On or After 1/1/2021: The regulations provide certain rules to facilitate the transition to the new actuarial tables. For gift tax purposes, if the date of a transfer is on or after January 1, 2021, and before the applicability date of the Treasury decision adopting these regulations as final regulations, the donor may choose to determine the value of the gift (and/or any applicable charitable deduction) under tables based on either Table 2000CM or Table 2010CM. Similarly, for estate tax purposes, if the decedent dies on or after January 1, 2021, and before the applicability date of the Treasury decision adopting these regulations as final regulations, the value of any interest (and/or any applicable charitable deduction) may be determined in the discretion of the decedent’s executor under tables based on either Table 2000CM or Table 2010CM, provided that the decedent’s executor must use the same mortality table to value all interests in the same property. However, the section 7520 interest rate to be utilized is the appropriate rate for the month in which the valuation date occurs, subject to the following special rule for certain charitable transfers. Specifically, in accordance with this transitional rule and the rules contained in §§1.7520-2(a)(2), 20.7520-2(a)(2), and 25.7520-2(a)(2), in cases involving a charitable deduction, if the valuation date occurs on or after January 1, 2021, but before the applicability date of the Treasury decision adopting these regulations as final regulations, and the executor or donor elects under section 7520(a) to use the section 7520 interest rate for a month that is prior to January 1, 2021, then the mortality experience contained in Table 2000CM must be used. If the executor or donor uses the section 7520 interest rate for a month that is on or after January 1, 2021, but before the applicability date of the Treasury decision adopting these regulations as final regulations, then the tables based on either Table 2000CM or Table 2010CM may be used. However, if the valuation date occurs on or after the applicability date of the Treasury decision adopting these regulations as final regulations, the executor or donor must use the new mortality experience contained in Table 2010CM even if the use of a prior month’s interest rate is elected under section 7520(a).

For Transfer Dates in May or June of 2009, you have the choice of using mortality Table 90CM or 2000CM. After June 2009 (and before 1/1/2021), the program will automatically use Table 2000CM.

For Transfer Dates in May or June of 1999, you have the choice of using mortality Table 80CNSMT or Table 90CM. After June 1999 (and before 5/1/2009), the program will automatically use Table 90CM.

For Transfer Dates after April 1989 and before May 1999, there was no transition period and Table 80CNSMT is used.

For dates before May 1989, the program uses Table LN from Treas. Reg. section 20.2031-7A(d)(6).

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