Planning with the New Mortality Tables

Planning with the New Mortality Tables

Article posted in Compliance on 3 May 1999| comments
audience: National Publication | last updated: 18 May 2011


Last Friday, we reported that Treasury issued temporary and proposed regulations revising the actuarial tables in valuing annuities, interests for life or terms of years, and remainder or reversionary interests. How do the new assumptions affect charitable deductions for split-interest charitable gifts? We've had time to run the numbers and you may be surprised at some of the results.

by Marc D. Hoffman

Surprise, Surprise! No, this is not Gomer Pyle talking, it is Treasury announcing the new mortality tables released on April 28, 1999 (and reported via a PGDC News Alert on Friday, April 29) are effective for transfers after April 30, 1999.

In a posting to the ABA-PTL listserve, Philadelphia-based attorney Daniel R. Ross shed some light on the short notice. "According to an IRS spokesman at today's ABA Tax Section Estate and Gift Tax Committee meeting, the tables were not actually available to the IRS until 1997 or 1998. Then, it took them a while to redo all of the examples in the regs to conform to the new tables. Finally, under the Congressional mandate to update the tables every ten years, the ten years run out May 1. The IRS recognizes the short notice, which is why they allow a two-month transition period when taxpayers can use either the new or old tables." The window for using the old table rates closes for transfers after June 30, 1999.

Comparing the Tables

But what do the tables really mean to gift planners and donors? The non-linear answer varies depending on the age and number of measuring lives. In general, people are living longer; therefore, life interests will be larger and remainder interests smaller. To understand the impact of the new tables, we compared the effect of the new mortality assumptions with the old ones using the most common deferred gift vehicle - the charitable remainder unitrust.

The following deduction factors assume transfers to unitrusts bearing a 7% payout rate. The unitrust amount is paid annually at the beginning of the year and the Charitable Midterm Federal Rate (CMFR) assumption is the May rate of 6.2%. Factors are calculated based on one and two-life trusts with income recipients ranging in age from 40 to 100 in ten year increments.

Charitable Remainder Unitrust - One Life

Age Old Tables New Tables
40 11.33% 10.47%
50 19.11% 17.76%
60 30.06% 28.46%
70 44.02% 42.32%
80 60.21% 58.60%
90 74.81% 74.38%
100 83.48% 84.64%

Charitable Remainder Unitrust - Two Life

Ages Old Tables New Tables
40/40 *5.30% *4.85%
50/50 10.20% *9.39%
60/60 18.50% 17.29%
70/70 31.14% 29.59%
80/80 48.06% 46.42%
90/90 65.32% 64.89%
100/100 76.58% 78.34%

* Trust fails 10% minimum remainder interest test.

Surprisingly, as the measuring ages approach the mid-90s, the Table U factors under the new tables cross over and are actually lower than under the old tables. Older trustors will, therefore, receive higher deductions under the new tables. The majority of trustors are, however, younger when they create a CRT and will experience about a one to two percent decrease in the value of their deductions. Prospective donors falling into this category should, therefore, consider completing their remainder interest gifts by the June 30, 1999 deadline (unless they want to throw in their two cents).

Results are similar for charitable remainder annuity trusts and are inverted for charitable lead trusts. Trusts measured by a term of years are unaffected all together.

Watch the CMFR

To add one more variable into mix, the choice of the monthly Charitable Midterm Federal Rate may also come into play. The CMFR plays a very small role in the computation of life and remainder interest factors for charitable remainder unitrusts and charitable lead unitrusts. Conversely, both charitable remainder annuity trusts and charitable lead annuity trusts are extremely sensitive to the rate. In fact, the selection of the rate may, depending on the facts, overshadow the effect of the mortality table changes altogether. With respect to both remainder and lead annuity trusts, the lower the CMFR, the lower the present value of the remainder interest. Therefore, those considering charitable lead annuity trusts with life measuring terms may benefit by creating them in May to take advantage of the two month lookback rule under section 7520(a) that would permit the trustor to use the March CMFR rate of 5.8%. April and May rates are 6.4% and 6.2%, respectively. Of course, this presupposes one thinks interest rates will remain higher.

If the valuation date occurs after April 30, 1999, and before July 1, 1999, and the executor or donor elects to use the CMFR for March 1999 or April 1999, then the old mortality tables must be used. If the executor or donor uses the CMFR for May 1999 or for June 1999, then either the old or new tables may be used. However, if the valuation date occurs after June 30, 1999, the executor or donor must use the new tables even if a prior month interest rate election is made.

In the absence of a crystal ball, if one recommendation can be gleaned, it is that one should run the numbers to compare the effect of both tables and rates on a proposed transfer.

The good news is that most of us will live a little longer. Accordingly, those who create remainder interest gifts should enjoy their retained interests for longer as well!

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