Computing the charitable income tax deduction for a single-life CRAT.

• Author: Ellentuck, Albert B.
• Position: Charitable remainder annuity trust

Editors note: This case study has been adapted from "Guide to Tax Planning for High Intone Individuals," 2nd Edition, by Anthony J. DeChellis, Douglas L. Weinbrenner, Catherine A. Roeder and Patrick L. Young, published by Practitioners Publishing Company, Fort Worth, Tex., 2001 ((800) 323-8724; www.ppcnet.com).

Facts: Harry, age 70, established a charitable remainder annuity trust (CRAT) when the Sec. 7520 rate was 7.4%. He transferred property worth $2 million to the trust, and will receive a $140,000 annuity payable annually on December 31 for life. Issue: How is the remainder interest valued?

Analysis

The IRS provides valuation tables for valuing annuities payable for life or a term of years (Sec. 7520(a)). These tables are based on a floating interest rate equal to 120% of the Federal midterm rate rounded to the nearest 0.2% (i.e., the Sec. 7520 rate) for the month in which the valuation date falls. These rates are published monthly in the same revenue ruling that provides the applicable Federal rates (AFRs) for that month.

The tables used in the valuation of annuities are located in IRS Pub. 1457 (Rev. 7/99), Actuarial Values, Alpha Volume. The following is a short description of each table:

1. Table S provides the factors for determining the present worth of an annuity payable for an individual's life.

2. Table B provides the factors for determining the present worth of an annuity payable for a term certain.

3. Table K provides the adjustment factors for annuities payable semiannually, quarterly, monthly and weekly.

4. Table J provides the adjustment factors for annuities payable at the beginning of annual, semiannual, quarterly, monthly and weekly periods for a term of years. (Table J is located in Regs. Sec. 20.2031-7(d)(6).)

The following is a step-by-step approach for determining the value of a remainder interest in a CRAT.

Computation

Step 1: Determine Sec. 7520 rate. The first step in determining the value of the annuity is to determine the Sec. 7520 rate for the month in which the valuation date falls. For inter vivos transfers, the valuation date is the date on which the property is transferred to the trust. However, the donor may elect to use the Sec. 7520 rate for either of the two previous months. The interest rate for each of the two months previous to Harry's transfer was 7.6%. The Sec. 7520 rates are found in the AFR. tables issued monthly by the IRS. The appropriate actuarial factor used to value an annuity payable for...