Taxation of Estates and Gifts


Annuities are included in one's gross estate if the annuity is receivable by someone because he survived the decedent and if the annuity was payable to the decedent (or he had the right to receive the annuity) alone or with another for decedent's life, a period not ascertainable without reference to his death, or for a period which does not end before his death. 26 U.S.C. § 2039(a).

Annuities are taxed under 26 U.S.C. § 72, which provides for an exclusion ratio of the investment paid divided by the expected return. (So exclude that ratio of each payment.)

When an annuity-holder dies without recovering all his basis, he can deduct that amount on his final tax return. 26 U.S.C. § 72(b)(3).

The ratio of the annuity that was paid by someone other than the decedent or his employer can not be included. 26 U.S.C. § 2039(b).

In a joint and survivor annuity, both people will satisfy 26 U.S.C. § 2039(a) if they die first because they both have a contractual right to the payments. The annuity to the potential survivor is deducted from that potential survivor's estate by 26 U.S.C. § 2039(b) instead, whether or not he actually survives. The second person to die is not included because of 26 U.S.C. § 2033.

To value an annuity, use the formula: annualPayment × annuityFactor = value

  • Use the annuity factors from the 7520 tables to solve for whatever part you need.
  • e.g., $8,000 per month at 70 years old: $96,000 × 8.4988 = value → value = $815,884.80

To value an annuity with a right of survivorship, use the formula: annuityFactor = (1 − remainderFactor) ÷ interestRate

To find the exact term (assuming a straight line) for a remainder factor, find the two closest terms in Table B and use the formula: term = termLower + (interestRateHigher − interestRateExact) ÷ ((interestRateHigher − interestRateLower) ÷ 1)

  • Basic slope stuff. Would need calculus to find the exact term.

A self-cancelling installment note is a promissory note sold by a beneficiary to his benefactor which is forgiven by the benefactor upon his death.

This high-end strategy theoretically evades estate tax, but the IRS will challenge it by asking how the self-cancelling was priced into the sale.