The Exact Method is an intuitive method of calculating the duration and final payment amount of the annuity. This method assumes the annuity grows at a rate equal to the§7520 rate and calculates the real payments and growth that would occur each year. The resulting schedule returns the exact amount payable in the final period.
The program defaults to using the IRS Annuity Factor Method. If you select the Exact Method, the program will include a schedule illustrating the exhaustion of the trust. When looking at this schedule, remember that the interest is compounded annually. Using the above example, the growth in the first year would equal 6.8% x $1,000,000 + 6.8% x $900,000 + 6.8% x $800,000 + 6% x $700,000. This, of course, assumes that the payments are made at the end of each year.
