What Tables Are Used to Determine Life Estate Interest in Property?
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Question:
In your article “What Happens to Capital Gain when Joint Owner of Life Estate Dies?” what table issued by the IRS was used to determine that 8% of the proceeds should go to the mother and 92% to the remaindermen? Are there several tables – one table for interest rates (issued monthly) and another table for life expectancy?
Response:
The Internal Revenue Service provides life estate valuation table here: https://www.irs.gov/retirement-plans/actuarial-tables. The tables are downloadable spreadsheets that show the valuations at different interest rates. Usually you use the “section 7520 rate,” which is 120 percent of the applicable Federal mid-term rate in effect for the month when the valuation date falls, rounded to the nearest 2 tenths of a percent. The IRS sets these rates every month and the most recent can be found by searching for the “applicable federal rate” or “AFR.”
The IRS provides tables both for single life estates and for those held by two people. For instance, a married couple may have a life estate in their home which will last as long as both of them are alive. Their joint life expectancy is longer than that of any of them individually, and thus the value of their life interest his greater than it would be if either of them held it individually.
Two demonstrate the effect of prevailing interest rates on life estate valuations we can compare the results today when we have higher rates with that in 2018 when the post you refer to was written. Then, the 94-year-old life estate owner would have been entitled to only 8% of the proceeds of the sale with the balance going to the remaindermen. The long-term applicable federal rate as of April 2023 is 4.02%. Looking at the 4% table provided by the IRS, the same 94-year-old life estate holder today would be entitled to 13% of the proceeds of sale.
The effect of changes in interest rates is greater for younger people. Due to their longer life expectancy, they get a greater benefit from higher rates. By way of example, at a 1% rate of interest, an 80-year-old life estate owner would be entitled to just 8% of the proceeds of a sale of property while they would get 26% at a 4% AFR.
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I am in a bind. My husband, who was a farmer, left a will with 2 life estate beneficiaries (myself and his nephew) and the Remainderman is a non-profid company, who has declared bankruptcy. I was never notified that a bankruptcy was in process as of January, 2022. My farmers farm has now been sold, and the net assets (which will be cash) will be distributed towards the end of the yar.
The realtor is handling the distribution of the funds from the sale and I don’t they are correct, and I hired an attorney who was supposed to have experience in two life estates, but has been unable to check this out. Are there any specific rules for the distribution of the funds. When I mentioned to the realtor that the Will says the funds should be divided equality, he said to ignore that. My logic is that these figures are not correct. He has taken the life estate factor for each and multified each times the $2M (I said that the factors should be multifpled by $1). Then he
just took the two factors and subtracted them from 100% for the Remainderman’s part. I think that the factor which is shown by each life estate holder is listed beside their factor for for the remainderman. The Attorney who was supposed to have experiene for two life estate holders, says it is okay and says there is no set rule for the distribution. Just because I am older and the nephew is younger, his amount is so much higher than mine, and the Remainderman is not getting the amount he should. The reason is that he multiplying the factors X $2 instead of $1 for life estate holders. Are these situations audited by anyone in the State? If the calculations are incorrect, does money have to be returned? { am 92 years and are conceerned that I am being taking advantage of.
Delores,
I’m not sure if I understand this completely. What I understand is that the property was sold for $2 million and the question is how to divide the proceeds among you, your nephew, and the remaindermen. The IRS does provide two-life tables here: https://www.irs.gov/retirement-plans/actuarial-tables. I don’t know your nephew’s age or the date of the sale, but the Section 7520 rate for October 2024 is 4.4%. (It was as high as 5.6% as recently as June.) By way of example, if your nephew is 60 years old and you’re 92, and using this figure, the life estate interest should be 59.8% and the remainder interest 40.2%, so $1,196,000 to you and your nephew and $804,000 to the remaindermen.
The next question is how to divvy up the life estate share between you and your nephew. I think what makes sense is to use the relative values of your and your nephew’s single life estate interests. Using the IRS single live estate tables and the same 4.4% interest rate, your interest would be 14.8% and your nephew’s if he were 60 years old would be 59.3%. Turning these into ratios, you should receive about a fifth of the share of the proceeds allocated to the life estate (19.8% to be exact), or $236,642 and your nephew the balance.
You will have to revise these calculations to reflect your nephew’s actual age and the Section 7520 rate for the month that the property was sold. At least, this would be my approach. There may be other valid ones as well.
Harry