Take-Away: With a census comes new actuarial studies. The census data derived from the 2010 census will result in the issuance of updated decennial life tables that show a much longer life expectancy that will be used in valuations and with several estate planning strategies. The unanswered question is when will the new life expectancy Tables have to be used with regard to several estate planning strategies?

Background: The source of the IRS’ actuarial/life expectancy tables is IRC 7520. That Tax Code section mandates that estate planners must use those Tables to value life estates, unitrust interests, remainders, and annuities. IRC 7520 requires that the Tables be updated every 10 years, to be effective on May 1. That did not happen on May 1, 2019 which was the scheduled date to begin using the new actuarial tables based on the 2010 census data. The IRS was waiting on the National Center for Health Statistics (at the Centers for Disease Control and Prevention) to issue the decennial life table for 2009-2011 before it created and published the new actuarial/life expectancy Tables.

That data has now been released. The decennial life Table is a distillation of the entire U.S. population, on a unisex basis, derived from the 2010 census, of the number of persons living at each age from 0 to 110. It is used to calculate the probability of an individual surviving from one age to another age. The 2010 table, already out of date, shows startling improvement in longevity. For example, the probability of survival from age 60 to age 90 went from 21.08% to 26.60% in just ten years.

Life Estate Factors: Once the new Tables are effective, the value of a life estate will be greater, and the value of a remainder interest will be less with the new Tables’ mortality assumptions.  A longer life expectancy can be an advantage if the value being measured is a lead interest for life (or the shorter of life or a term) of years with regard to a charitable lead trust (CLAT),  yet the charitable income tax deduction for a contribution to a charitable remainder annuity trust for a life, or for  two lives (a CRAT), will be smaller. With longer life expectancies, it will become even more difficult to qualify as a tax exempt charitable remainder annuity trust (CRAT) with its two qualifying ‘tests’ that (i) 10% of the value must be assured to the charity as its remainder interest, and (ii) there must be at least a 5% probability that the CRAT will not become exhausted before the individual who is to receive the annuity dies. Reduced as well will be the charitable income tax deduction for a gift of a remainder interest in a personal residence or a farm to a charity which follows the donor’s retained life estate interest in the real property. In short, charitable income tax deductions will be affected by the change in the IRS’s life expectancy Tables.

Quick Examples:

  • Life Estate Increase: Assuming an IRC 7520 rate of 5% (which is much higher than the current IRC 7520 rates but more likely to prevail over the next 10 years) a 60 year old person’s life estate ‘factor’ goes from .60739 to .63394, or a 4.37% increase.
  • Decrease in Income Tax Charitable Deduction: A 70 year old individual makes a $100,000 contribution to a charitable remainder unitrust (CRUT) that pays to the individual a 5% unitrust distribution quarterly. The charitable income tax deduction that arises on the transfer of $100,000 to on the CRUT will drop from $51,981 to $49,111, or $2,981 less in the income tax charitable deduction.

Unanswered Question: We know that the IRS just announced last month that the effective date for the ‘new’ life expectancy Tables will be January 1, 2022 for required minimum distributions (RMDs), which will lead to smaller taxable RMDs for an IRA recipient. However, IRC 7520 mandates that the new life expectancy Tables, based on the decennial life table, is set to begin May 1 every ten years. Consequently, the question is whether the effective date for the new Tables based on the 2009-2011 census data will be May 1, 2019, or some other date, despite the use of mandatory language in IRC 7520. Apparently the IRS did not feel compelled to give the new life expectancy Tables for RMDs retroactive effect to May 1, 2019, but then again the RMDs are not mentioned in IRC 7520, which is used primarily for transfer tax valuation purposes.

Conclusion: Given the mandatory language used in IRC 7520 that May 1, 2019 should be the effective date for the ‘new’ life expectancy Tables based on the 2010 census data, it may be possible to choose which Table best implements an individual’s wealth transfer planning objectives: the 2000 census based Tables (which provide a shorter life expectancy) or the 2010 census base Tables (which provide a longer life expectancy.) It will be interesting to see how this plays out if the IRS chooses to ignore the explicit language in IRC 7520.