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Technology Probate

Technology-Probate provides information on current technology and microcomputer software of interest in the probate and estate planning areas. The editors of Probate & Property welcome information and suggestions from readers.

Split-Interest Calculations

As this column was being written, the Tax Court announced its decision in Walton v. Commissioner, 115 T.C. No. 41(2000), invalidating Example 5 of Treas. Reg. § 25.2702-3(e) and spotlighting how important the valuation of life estates, remainders, annuities, unitrusts and other split-interests can be to estate and gift tax calculations and planning. This column reviews some types of calculations that can be performed with (and without) specialized software and some software features to watch for in anticipation of calculating the present values of life estates, remainders, annuities and unitrusts.

Basic Calculations

Some split-interest calculations can be done using factors from printed tables:

• Factors for incomes, annuities, remainders and unitrusts for one life or for a term of years can be calculated using tables found in IRS regulations, specifically § 20.2031-7 (for incomes, remainders and annuities) and § 1.664-4 (for unitrusts). 
• Factors for two lives, or the shorter (or longer) of one life and a term, can be calculated using tables found in IRS Publications 1457 (Book Aleph),1458 (Book Beth), and 1459 (Book Gimel). Most other calculations and factors require either one of the software programs listed below or a special factor from the IRS National Office.

The following specific calculations are included in most of the software programs listed below:

• Factors for simple annuities, income interests and remainders. 
• Factors for charitable remainder annuity trusts or unitrusts for a term of years, for one or more lives or for the shorter of one or more lives and a term of years. Some programs also calculate a factor for the longer of one or more lives and a term of years. 
• Factors for charitable lead annuity trusts or unitrusts for a term of years, for one or more lives or for the shorter of one or more lives and a term of years. Some programs also calculate a factor for the longer of one or more lives and a term of years. 
• Programs specializing in charitable deduction calculations may also provide factors for pooled income funds. 
• An income tax deduction is allowed for a charitable gift of a remainder interest in a personal residence or farm. The value of the buildings must be depreciated, however, and not all programs can combine the actuarial and depreciation calculations. 
• Factors for grantor retained annuity trusts and unitrusts. 
• Factors to value the remainder interest in a personal residence trust, including trusts in which the grantor has retained a right of reversion. The factors are usually based on a simple term of years, but some lawyers have begun asking for factors for a reversion on the death of the first to die of two lives, which not all programs can calculate.

Some calculations probably will not be found in any commercial software. Calculations involving succeeding life interests combined with a term of years, contingent remainders for more than two lives and annuities payable with an offset from the anniversary of the trust are all too complicated and too rare to be included in software marketed to lawyers.

Other Calculations and Features

In addition to the calculation of the raw factors, there are other features to look for that may be helpful (or even necessary) to comply with tax laws and optimize the results for the client.

• Exhaustion tests. Calculations involving annuity trusts are complicated by Treas. Reg. § 1.7520-3(b)(2)(i), which states that any annuity pay-able from a limited fund cannot extend for a term beyond which the fund will be exhausted (assuming that the fund earns income at the § 7520 discount rate). So, for example, if a charitable lead annuity trust is payable for a life age 70 and the trust will be exhausted after 30 years, the annuity interest must be calculated based on the shorter of the life and a term of 30 years. Calculations involving charitable lead annuity trusts, charitable remainder annuity trusts and grantor retained unitrusts should all take this limitation into account and automatically determine the exhaustion term and the required factors for that reduced term.

• The IRS also requires that charitable remainder annuity trusts not have a greater than 5% probability of exhaustion during the measuring life or lives. Software for charitable remainder annuity trusts should perform this 5% test automatically and warn the user if the trust might not qualify.

• Income tax consequences. In the case of a charitable split-interest gift during lifetime, there may be a charitable income tax deduction, and some software programs can automatically calculate the amount and after-tax value of the deduction, even taking into account charitable deduction limits and carry-forwards, if information is entered for the client's adjusted gross income and percentage deduction allowable.
• Future value projections. All of the calculations described above are attempts to reduce future interests to a present value, based on the § 7520 discount rate. To compare the consequences of different types of gifts (or to compare the consequences of making a gift with the consequences of not making the gift), it is often desirable to project the future values, including both the income received and the appreciation of assets constituting the principal of the trust or gift. This may be particularly meaningful if the lawyer and the client believe that the property that is the subject of the gift will experience a rate of income and capital growth that is significantly more or less than the discount rate required by § 7520. Some programs may be able to perform these kinds of economic projections based on assumed yields entered by the user.
• Optimizations. Some calculations have limits for which lawyers may want to "optimize." For example, a charitable remainder unitrust must have a charitable remainder with a value of at least 10%, and many lawyers want to calculate the greatest possible payout that will still qualify with a 10% remainder. Many lawyers also consider it to be desirable to "zero out" a grantor retained annuity trust or charitable lead annuity trust by raising the annuity payout to the point at which the present value of the remainder is zero. Many software programs will perform these optimizations automatically.
• Comparisons and graphs. Sometimes the "optimization" of a particular type of trust is not clear-cut, and the lawyer would like to show the client a range of values and a comparison of the possible results. One example is a personal residence trust, because the gift tax value of the remainder is dependent on the term of the trust and the client may not be sure which term to select. Some programs can show a range of different terms for QPRTs and the resulting taxable gifts, and can display the different gift values in a graph that shows how the value of the gift goes down as the term of the trust goes up. Similar calculations might also be desirable for clients that wish to set up a charitable remainder unitrust and wanting to give more than the minimum 10% remainder value but are not sure how the change in the payout rate will affect the value of the remainder.

Software

Although there is a great deal of overlap, software that can perform some or all of the types of calculations described above has been divided into two groups, those for general purpose estate planning and those devoted mainly to charitable gift planning.

• Factors and split-interest calculators. The following programs calculate a variety of factors for split-interest calculations, as well as some or all of the charitable and other calculations described above.

Estate Planning Tools; 
IRS Factors Calculator
  Brentmark Software 
(800) 879-6665 
www.brentmark.com

Factuary 
ViewPlan Division of CCH 
Incorporated 
(800) 826-2127 
www.viewplan.com

NumberCruncher; 
IRS Factors Calculator  
Leimberg & LeClair, Inc.
(610) 525-5216 
www.leimberg.com

Tiger Tables 
Tiger Tables Software 
(314) 231-2800 
www.tigertables.com

Zcalc 
Lexite Development, LLC 
(888) 552-4477 
www.zcalc.com

• Charitable giving. The following programs were designed to illustrate the advantages of charitable giving, either lifetime or testamentary, usually through split-interest trusts (charitable remainder trusts or charitable lead trusts).

Beneview 
ViewPlan Division of CCH 
Incorporated 
(800) 826-2127
www.viewplan.com

Charitable Financial Planner 
Brentmark Software 
(800) 879-6665 
www.brentmark.com

Charitable Scenario Deduction 
Calculator 
PhilanthroTec 
(704) 845-5527 
www.ptec.com

Charitable Quick-Plan 
Kettley Publishing 
(800) 777-3162 
www.kettley.com

Crescendo Pro 
Crescendo Software (Comdel, Inc.) 
(800) 858-9154 
www.crescendosoft.com

EPLAN 
U.S. Trust Company of New York 
(212) 852-3564 
www.ustrust.com

Planned Giving Manager 
PG Calc Inc. 
(888) 497-4970 
www.pgcalc.com

Want to look up past columns? For the last four years, the Section has been putting the text of columns on the Internet as they have been published. An index of past columns and the software covered by those columns is now available through the Technology and Economics (K-2) Committee, at http://www.abanet.org/rppt/cwp. html.

Technology-Probate Editor: Daniel B. Evans, P.O. Box 27370, Philadelphia, PA 19118, dan@evans-legal.com.