[Code of Federal Regulations] [Title 26, Volume 14] [Revised as of April 1, 2004] From the U.S. Government Printing Office via GPO Access [CITE: 26CFR25.2512-5] [Page 543-547] TITLE 26--INTERNAL REVENUE CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY (CONTINUED) PART 25_GIFT TAX; GIFTS MADE AFTER DECEMBER 31, 1954--Table of Contents Sec. 25.2512-5 Valuation of annuities, unitrust interests, interests for life or term of years, and remainder or reversionary interests. (a) In general. Except as otherwise provided in paragraph (b) of this section and Sec. 25.7520-3(b), the fair market value of annuities, unitrust interests, life estates, terms of years, remainders, and reversions transferred by gift is the present value of the interests determined under paragraph (d) of this section. Section 20.2031-7 of this chapter (Estate Tax Regulations) and related sections provide tables with standard actuarial factors and examples that illustrate how to use the tables to compute the present value of ordinary annuity, life, and remainder interests in property. These sections also refer to standard and special actuarial factors that may be necessary to compute the present value of similar interests in more unusual fact situations. These factors and examples are also generally applicable for gift tax purposes in computing the values of taxable gifts. (b) Commercial annuities and insurance contracts. The value of life insurance contracts and contracts for the payment of annuities issued by companies regularly engaged in their sale is determined under Sec. 25.2512-6. (c) Actuarial valuations. The present value of annuities, unitrust interests, life estates, terms of years, remainders, and reversions transferred by gift after April 30, 1999, is determined under paragraph (d) of this section. The present value of annuities, unitrust interests, life estates, terms of years, remainders, and reversions transferred by gift before May 1, 1999, is determined under the following sections: ------------------------------------------------------------------------ Transfers ----------------------------------------------- Applicable regulations After Before ------------------------------------------------------------------------ 01-01-52 25.2512-5A(a) 12-31-51.......................... 01-01-71 25.2512-5A(b) 12-31-70.......................... 12-01-83 25.2512-5A(c) 11-30-83.......................... 05-01-89 25.2512-5A(d) [[Page 544]] 04-30-89.......................... 05-01-99 25.2512-5A(e) ------------------------------------------------------------------------ (d) Actuarial valuations after April 30, 1999--(1) In general. Except as otherwise provided in paragraph (b) of this section and Sec. 25.7520-3(b) (relating to exceptions to the use of prescribed tables under certain circumstances), if the valuation date for the gift is after April 30, 1999, the fair market value of annuities, life estates, terms of years, remainders, and reversions transferred after April 30, 1999, is the present value of such interests determined under paragraph (d)(2) of this section and by use of standard or special section 7520 actuarial factors. These factors are derived by using the appropriate section 7520 interest rate and, if applicable, the mortality component for the valuation date of the interest that is being valued. See Sec. Sec. 25.7520-1 through 25.7520-4. The fair market value of a qualified annuity interest described in section 2702(b)(1) and a qualified unitrust interest described in section 2702(b)(2) is the present value of such interests determined under Sec. 25.7520-1(c). (2) Specific interests. When the donor transfers property in trust or otherwise and retains an interest therein, generally, the value of the gift is the value of the property transferred less the value of the donor's retained interest. However, if the donor transfers property after October 8, 1990, to or for the benefit of a member of the donor's family, the value of the gift is the value of the property transferred less the value of the donor's retained interest as determined under section 2702. If the donor assigns or relinquishes an annuity, life estate, remainder, or reversion that the donor holds by virtue of a transfer previously made by the donor or another, the value of the gift is the value of the interest transferred. However, see section 2519 for a special rule in the case of the assignment of an income interest by a person who received the interest from a spouse. (i) Charitable remainder trusts. The fair market value of a remainder interest in a pooled income fund, as defined in Sec. 1.642(c)-5 of this chapter, is its value determined under Sec. 1.642(c)-6(e) of this chapter (see Sec. 1.642(c)-6A for certain prior periods). The fair market value of a remainder interest in a charitable remainder annuity trust, as described in Sec. 1.664-2(a) of this chapter, is its present value determined under Sec. 1.664-2(c) of this chapter. The fair market value of a remainder interest in a charitable remainder unitrust, as defined in Sec. 1.664-3 of this chapter, is its present value determined under Sec. 1.664-4(e) of this chapter. The fair market value of a life interest or term for years in a charitable remainder unitrust is the fair market value of the property as of the date of transfer less the fair market value of the remainder interest, determined under Sec. 1.664-4(e)(4) and (5) of this chapter. (ii) Ordinary remainder and reversionary interests. If the interest to be valued is to take effect after a definite number of years or after the death of one individual, the present value of the interest is computed by multiplying the value of the property by the appropriate remainder interest actuarial factor (that corresponds to the applicable section 7520 interest rate and remainder interest period) in Table B (for a term certain) or the appropriate Table S (for one measuring life), as the case may be. Table B is contained in Sec. 20.2031-7(d)(6) of this chapter and Table S (for one measuring life when the valuation date is after April 30, 1999) is included in Sec. 20.2031-7(d)(7) of this chapter and Internal Revenue Service Publication 1457. See Sec. 20.2031-7A(e)(4) of this chapter containing Table S and Life Table 80CNSMT for valuation of interests after April 30, 1989, and before May 1, 1999. For information about obtaining actuarial factors for other types of remainder interests, see paragraph (d)(4) of this section. (iii) Ordinary term-of-years and life interests. If the interest to be valued is the right of a person to receive the income of certain property, or to use certain nonincome-producing property, for a term of years or for the life of one individual, the present value of the interest is computed by multiplying the value of the property by the appropriate term-of-years or life interest actuarial factor (that corresponds to the applicable section 7520 interest rate [[Page 545]] and term-of-years or life interest period). Internal Revenue Service Publication 1457 includes actuarial factors for an interest for a term of years in Table B and for the life of one individual in Table S (for one measuring life when the valuation date is after April 30, 1999). However, term-of-years and life interest actuarial factors are not included in Table B in Sec. 20.2031-7(d)(6) or Table S in Sec. 20.2031-7(d)(7) (or in Sec. 20.2031-7A(e)(4)) of this chapter. If Internal Revenue Service Publication 1457 (or any other reliable source of term-of-years and life interest actuarial factors) is not conveniently available, an actuarial factor for the interest may be derived mathematically. This actuarial factor may be derived by subtracting the correlative remainder factor (that corresponds to the applicable section 7520 interest rate) in Table B (for a term of years) in Sec. 20.2031-7(d)(6) of this chapter or in Table S (for the life of one individual) in Sec. 20.2031-7(d)(7) of this chapter, as the case may be, from 1.000000. For information about obtaining actuarial factors for other types of term-of-years and life interests, see paragraph (d)(4) of this section. (iv) Annuities. (A) If the interest to be valued is the right of a person to receive an annuity that is payable at the end of each year for a term of years or for the life of one individual, the present value of the interest is computed by multiplying the aggregate amount payable annually by the appropriate annuity actuarial factor (that corresponds to the applicable section 7520 interest rate and annuity period). Internal Revenue Service Publication 1457 includes actuarial factors in Table B (for an annuity payable for a term of years) and in Table S (for an annuity payable for the life of one individual when the valuation date is after April 30, 1999). However, annuity actuarial factors are not included in Table B in Sec. 20.2031-7(d)(6) of this chapter or Table S in Sec. 20.2031-7(d)(7) (or in Sec. 20.2031-7A(e)(4)) of this chapter. If Internal Revenue Service Publication 1457 (or any other reliable source of annuity actuarial factors) is not conveniently available, an annuity factor for a term of years or for one life may be derived mathematically. This annuity factor may be derived by subtracting the applicable remainder factor (that corresponds to the applicable section 7520 interest rate and annuity period) in Table B (in the case of a term-of-years annuity) in Sec. 20.2031-7(d)(6) of this chapter or in Table S (in the case of a one-life annuity) in Sec. 20.2031-7(d)(7) of this chapter, as the case may be, from 1.000000 and then dividing the result by the applicable section 7520 interest rate expressed as a decimal number. See Sec. 20.2031-7(d)(2)(iv) of this chapter for an example that illustrates the computation of the present value of an annuity. (B) If the annuity is payable at the end of semiannual, quarterly, monthly, or weekly periods, the product obtained by multiplying the annuity factor by the aggregate amount payable annually is then multiplied by the applicable adjustment factor set forth in Table K in Sec. 20.2031-7(d)(6) of this chapter at the appropriate interest rate component for payments made at the end of the specified periods. The provisions of this paragraph (d)(2)(iv)(B) are illustrated by the following example: Example. In July, the donor agreed to pay the annuitant the sum of $10,000 per year, payable in equal semiannual installments at the end of each period. The semiannual installments are to be made on each December 31st and June 30th. The annuity is payable until the annuitant's death. On the date of the agreement, the annuitant is 68 years and 5 months old. The donee annuitant's age is treated as 68 for purposes of computing the present value of the annuity. The section 7520 rate on the date of the agreement is 10.6 percent. Under Table S in Sec. 20.2031- 7(d)(7) of this chapter, the factor at 10.6 percent for determining the present value of a remainder interest payable at the death of an individual aged 68 is .29691. Converting the remainder factor to an annuity factor, as described above, the annuity factor for determining the present value of an annuity transferred to an individual age 68 is 6.6329 (1.00000 minus .29691 divided by .106). The adjustment factor from Table K in Sec. 20.2031-7(d)(6) of this chapter in the column for payments made at the end of each semiannual period at the rate of 10.6 percent is 1.0258. The aggregate annual amount of the annuity, $10,000, is multiplied by the factor 6.6329 and the product multiplied by 1.0258. The present value of the donee's annuity is, therefore, $68,040.29 ($10,000 x 6.6329 x 1.0258). (C) If an annuity is payable at the beginning of annual, semiannual, quarterly, monthly, or weekly periods for a [[Page 546]] term of years, the value of the annuity is computed by multiplying the aggregate amount payable annually by the annuity factor described in paragraph (d)(2)(iv)(A) of this section; and the product so obtained is then multiplied by the adjustment factor in Table J in Sec. 20.2031- 7(d)(6) of this chapter at the appropriate interest rate component for payments made at the beginning of specified periods. If an annuity is payable at the beginning of annual, semiannual, quarterly, monthly, or weekly periods for one or more lives, the value of the annuity is the sum of the first payment plus the present value of a similar annuity, the first payment of which is not to be made until the end of the payment period, determined as provided in paragraph (d)(2)(iv)(B) of this section. (v) Annuity and unitrust interests for a term of years or until the prior death of an individual--(A) Annuity interests. The present value of an annuity interest that is payable until the earlier to occur of the lapse of a specific number of years or the death of an individual may be computed with values from the tables in Sec. 20.2031-7(d)(6) and (d)(7) of this chapter as described in the following example: Example. The donor transfers $100,000 into a trust and retains the right to receive an annuity from the trust in the amount of $6,000 per year, payable in equal semiannual installments at the end of each period. The semiannual installments are to be made on each June 30th and December 31st. The annuity is payable for 10 years or until the donor's prior death. At the time of the transfer, the donor is 59 years and 6 months old. The donor's age is taken as 60 for purposes of computing the present value of the retained annuity. The section 7520 rate for the month in which the transfer occurred is 9.8 percent. The present value of the donor's retained interest is $35,709.13, determined as follows: TABLE S value at 9.8 percent, age 60......................... .21669 TABLE S value at 9.8 percent, age 70......................... .34762 TABLE 90CM value at age 70................................... .71357 TABLE 90CM value at age 60................................... .85537 TABLE B value at 9.8 percent, 10 years....................... .392624 TABLE K value at 9.8 percent................................. 1.0239 Factor for donor's retained interest at 9.8 percent: [GRAPHIC] [TIFF OMITTED] TR28SE00.001 Present value of donor's retained interest: ($6,000 x 5.8126 x 1.0239)...$35,709.13 (B) Unitrust interests. The present value of a unitrust interest that is payable until the earlier to occur of the lapse of a specific number of years or the death of an individual may be computed with values from the tables in Sec. Sec. 1.664-4(e)(6) and (e)(7) and Sec. 20.2031-7(d)(7) of this chapter as described in the following example: Example. The donor who, as of the nearest birthday, is 60 years old, transfers $100,000 to a unitrust on January 1st. The trust instrument requires that each year the trust pay to the donor, in equal semiannual installments on June 30th and December 31st, 6 percent of the fair market value of the trust assets, valued as of January 1st each year, for 10 years or until the prior death of the donor. The section 7520 rate for the January in which the transfer occurred is 9.8 percent. Under Table F(9.8) in Sec. 1.664-4(e)(6) of this chapter, the appropriate adjustment factor is .932539 for semiannual payments payable at the end of the semiannual period. The adjusted payout rate is 5.595 percent (6% x .932539). The present value of the donor's retained interest is $40,848.00 determined as follows: TABLE U(1) value at 5.6 percent, age 60...................... .35375 TABLE U(1) value at 5.6 percent, age 70...................... .49342 TABLE 90CM value at age 70................................... 71357 TABLE 90CM value at age 60................................... 85537 TABLE D value at 5.6 percent, 10 years....................... .561979 Factor for donor's retained interest at 5.6 percent: (1.000000 - .35375) - (.561979 x (71357/85537) x (1.000000 - .49342)) = .40876 TABLE U(1) value at 5.4 percent, age 60...................... .36542 TABLE U(1) value at 5.4 percent, age 70...................... .50473 TABLE 90CM value at age 70................................... 71357 [[Page 547]] TABLE 90CM value at age 60................................... 85537 TABLE D value at 5.4 percent, 10 years....................... .573999 Factor for donor's retained interest at 5.4 percent: [GRAPHIC] [TIFF OMITTED] TR28SE00.003 Interpolation adjustment: [GRAPHIC] [TIFF OMITTED] TR12JN00.006 Factor at 5.4 percent, age 60................................ .39742 Plus: Interpolation adjustment............................... .01106 ---------- Interpolated Factor.......................................... .40848 Present value of donor's retained interest: ($100,000 x .40848)..........$40,848.00 (3) Transitional rule. If the valuation date of a transfer of property by gift is after April 30, 1999, and before July 1, 1999, the fair market value of the interest transferred is determined by use of the section 7520 interest rate for the month in which the valuation date occurs (see Sec. Sec. 25.7520-1(b) and 25.7520-2(a)(2)) and the appropriate actuarial tables under either paragraph (d)(2) of this section or Sec. 25.2512-5A(e), at the option of the donor. However, with respect to each individual transaction and with respect to all transfers occurring on the valuation date, the donor must use the same actuarial tables (for example, gift and income tax charitable deductions with respect to the same transfer must be determined based on the same tables, and all transfers made on the same date must be valued based on the same tables). (4) Publications and actuarial computations by the Internal Revenue Service. Many standard actuarial factors not included in Sec. Sec. 20.2031-7(d)(6) or (d)(7) of this chapter are included in Internal Revenue Service Publication 1457, ``Actuarial Values, Book Aleph,'' (7- 1999). Internal Revenue Service Publication 1457 also includes examples that illustrate how to compute many special factors for more unusual situations. A copy of this publication is available for purchase from the Superintendent of Documents, United States Government Printing Office, Washington, DC 20402. See Sec. 25.2512-5A for publications containing actuarial factors for valuing interests for which the valuation date is before May 1, 1999. If a special factor is required in the case of a completed gift, the Service may furnish the factor to the donor upon a request for a ruling. The request for a ruling must be accompanied by a recitation of the facts including a statement of the date of birth for each measuring life, the date of the gift, any other applicable dates, and a copy of the will, trust, or other relevant documents. A request for a ruling must comply with the instructions for requesting a ruling published periodically in the Internal Revenue Bulletin (see Sec. Sec. 601.201 and 601.601(d)(2)(ii)(b) of this chapter) and include payment of the required user fee. (e) Effective dates. This section applies after April 30, 1999. [T.D. 8540, 59 FR 30174, June 10, 1994, as amended by T.D. 8819, 64 FR 23224, Apr. 30, 1999; T.D. 8886, 65 FR 36940, June 12, 2000; 65 FR 39470, June 26, 2000; 65 FR 58222, Sept. 28, 2000]