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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