Rev. Rul. 77-454

Advice has been requested concerning the gift tax consequences of the conveyance of property to a trust under the circumstances described below.

On August 9, 1976, A executed an irrevocable deed of trust and transferred $70,000 in cash to the trustee. Under the terms of the trust, the trustee is to pay A, out of trust assets, $6,288.86 at the end of each year for the balance of A's life. The trust will terminate at the death of A, and the remaining trust property, if any, is payable to A's grandchildren. A, a male, was 51 years old on the nearest birthday to the date of the trust agreement.

Section 2512(b) of the Internal Revenue Code of 1954 provides that when property is transferred for less than an adequate and full consideration in money or money's worth, the amount by which the value of the property transferred exceeds the value of consideration received shall be deemed a gift for Federal gift tax purposes.

Section 25.2512-9(a)(1)(i) of the Gift Tax Regulations provides that when a donor transfers property in trust or otherwise and retains an interest therein, the value of the gift is the value of the property transferred less the value of the donor's retained interest. See also section 25.2511-1(e). Section 25.2512-9 of the regulations provides several tables for use in determining the present values of annuities, life estates, and remainders transferred after December 31, 1970. Table A(1) sets forth the present worth of $1.00 payable in the form of an annuity, life estate, or remainder for the life of a male at each age listed therein, with an annual interest rate of six percent.

The present worth of an annuity of $1.00 payable at the end of each year for the life of a male aged 51 years is $11.1308, as set forth in Table A(1). (The above factor of $11.1308, when multiplied by A's annuity of $6,288.86, produces a present value of $70,000, which is equal to the value of the property transferred by A to the trust.)

The annuity factors set forth in Table A(1) are based upon the assumption that payments can actually be received for each year even if the annuitant survives to age 109. If the annuity payments are to be drawn from a particular fund, however, an annuity factor from Table A(1) is applicable only if the fund is large enough to support the annuity in the event the annuitant lives to age 109. For example, an annuity payable only from a fund of $200 cannot be valued by using a factor from Table A(1) if an annuitant aged 51 years is to receive annual payments of $100 for life. In such a situation, the annuitant's right to payments is not worth $1,113 (the value produced through the use of a factor of $11.1308 from Table A(1).) On the contrary, it is worth something less than $200, due to the possibility that the annuitant may die before the fund is exhausted.

In the present case, $70,000 in trust assets were available, at the date of the annuity agreement, for annual payments of $6,288.86 to A for life. The annual payments will gradually exhaust the available fund because they are greater than the six percent interest that will presumably be earned by the fund each year. The fund will be sufficient to make the annual payment of $6,288.86 for the first 18 years. At the end of the 19th year, the fund will only be able to make a payment of $5,769.23. Therefore, in the present case, A has received the right to receive the annuity at the end of each year until death or until the fund is exhausted, whichever occurs first.

Valuation of the right to receive payment over a term of years or until the death of an individual, whichever occurs first, involves the use of a special factor which the Service will compute upon request in accordance with section 25.2512-9(e) of the regulations. The factor may also be computed through the use of Internal Revenue Service Publication 723A, entitled "Actuarial Values II, Factors at 6 Percent Involving One and Two Lives." Example 8, at page 1-3 of Publication 723A, sets forth the method for computing the value of an annuity payable for a stated period of years or until the prior death of a person of a particular age. In the present case, based on the method set forth in Example 8, the value of A's right to receive, if living, $6,288.86 at the end of each year for 18 years, plus a final payment of $5,769.23 at the end of the 19th year, is $61,133.25.

Accordingly, since A transferred $70,000 to the trust but retained an annuity interest in the trust worth $61,133.25, the amount of A's gift in trust on the date of the agreement is $8,866.75, which is the difference between the amount transferred by A that day ($70,000) and the value of the retained amount ($61,133.25).