How Do You Use IRS Actuarial Tables for Valuations?

The Internal Revenue Service provides actuarial tables to assign a present-day value to future interests in property for federal gift and estate tax administration. When a person transfers property but the recipient’s right to possess or enjoy it is delayed, the tables provide a method to determine the taxable value of the transfer. This is common in estate planning where interests like annuities, life estates, or remainder interests are created. This valuation is necessary for accurately reporting the transfer on a gift tax return (Form 709) or an estate tax return (Form 706).

An annuity is a right to receive a fixed payment for a period, a life estate gives someone the right to use property for their lifetime, and a remainder interest is the right to receive property after another interest ends. The tables use a combination of interest rate assumptions and mortality data to translate the future value of these interests into a current dollar amount.

The Section 7520 Interest Rate

A specific interest rate known as the Section 7520 rate is at the core of all actuarial valuations. This rate is mandated by Internal Revenue Code Section 7520 and serves as a standardized assumption for the expected earnings of the property being valued. Using a uniform benchmark ensures that valuations are consistent and prevents disputes over what might be a reasonable rate of return.

The IRS determines the Section 7520 rate on a monthly basis. The calculation is 120% of the applicable federal mid-term rate, compounded annually, and then rounded to the nearest two-tenths of a percent. The applicable federal rates (AFRs) reflect the average yield on U.S. Treasury obligations, linking the valuation rate to current economic conditions.

Taxpayers can find the current and historical Section 7520 rates in the Index of Applicable Federal Rates (AFR) Rulings, which is updated monthly on the IRS website. The proper rate to use for a valuation is the one in effect for the month in which the transfer occurs. For example, if a gift creating a life estate is made on March 15, the Section 7520 rate for March must be used.

A limited exception exists for certain charitable transfers, where the taxpayer may elect to use the Section 7520 rate from either of the two months preceding the month of the transfer. This flexibility allows a donor to choose a more favorable rate, potentially increasing the value of a charitable deduction. Outside of this specific context, the rate for the month of the valuation date is mandatory.

Information Required for Valuation

Before a valuation can be performed using the IRS tables, several specific pieces of information must be gathered. The first is the valuation date, which is the exact date the transfer of property becomes legally effective. For a gift, this is the date the gift is completed; for an estate, it is the decedent’s date of death.

With the valuation date established, the next step is to identify the applicable Section 7520 interest rate for the month in which the valuation date falls. This rate is a primary component of the calculation and is cross-referenced within the actuarial tables.

The age of any individual whose life measures the duration of an interest is another required input. The regulations specify that the age to be used is the person’s age on their birthday nearest to the valuation date. For example, if a valuation date is July 1, 2024, and the individual’s 60th birthday was on January 10, 2024, their age for the calculation is 60.

Finally, the user must know the fair market value of the entire property involved as of the valuation date. The terms of the interest being valued must also be clearly defined. If it is an annuity, the amount of the payment and its frequency, such as annually or quarterly, are also necessary details.

Common IRS Actuarial Tables and Their Functions

Once the necessary information is collected, the next step is to select the appropriate actuarial table. The IRS publishes several tables, each designed for a different type of future interest, which are found in IRS Publications 1457, 1458, and 1459.

The most used table for interests dependent on a single person’s life is Table S. This table is organized by age and the Section 7520 interest rate. It provides factors for valuing single life annuities, life estates, and remainder interests. For any given age and interest rate, the table shows three corresponding factors: one for an annuity, one for a life estate, and one for the remainder interest that follows the life estate.

For interests that are not measured by a person’s life but rather for a fixed number of years, Table B is the correct tool. This is known as a ‘term certain’ valuation. Table B provides factors for valuing a remainder interest, an income interest, and an annuity that will last for a specified number of years.

Underpinning the life-based tables is a mortality table. For valuations performed on or after June 1, 2023, the IRS uses Table 2010CM, which is based on mortality data from the 2010 census. For valuations with dates from May 1, 2009, through May 31, 2023, the previous Table 2000CM was used. It is a requirement that all interests in the same property be valued using the same mortality basis.

For more complex situations involving two lives, such as a survivorship annuity or a remainder interest that takes effect after the death of two people, other tables are available. For instance, Table R(2) is used for valuing last-to-die remainder factors based on two lives.

Calculating the Value of Future Interests

With the required data and correct table, the final step is to perform the calculation. The process involves multiplying the fair market value of the property by the appropriate factor found in the tables to determine a present value for tax reporting.

To value a life estate, one would use Table S. First, locate the block of data corresponding to the applicable Section 7520 interest rate. Within that block, find the row for the life tenant’s age and use the factor listed in the ‘Life Estate’ column, multiplying it by the total fair market value of the property.

Valuing a remainder interest that follows a single life estate uses a similar process. Using the same age and interest rate in Table S, one would select the factor from the ‘Remainder’ column and multiply it by the property’s total fair market value. An alternative method is to first calculate the value of the life estate and then subtract that amount from the total property value; the result is the value of the remainder.

For a simple annuity payable for a person’s life, the calculation again relies on Table S. The user finds the factor in the ‘Annuity’ column for the annuitant’s age and the correct Section 7520 rate. This factor is then multiplied by the actual annual annuity payment amount to determine the total present value. For annuities paid more frequently than annually, an additional adjustment factor from Table K may be required.