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Updated IRS mortality tables will shift the economics of life expectancy–based estate planning

It didn’t take long for surging interest rates to alter the economics of estate planning. This is particularly true for estate planning transactions that rely on the IRS’s published applicable federal rates, e.g., loans and installment sales. Also affected are split-interest trust transactions calculated using the IRS “7520” rate, e.g., grantor-retained annuity trusts, qualified personal residence trusts, charitable remainder trusts, charitable lead trusts, and more. Adding to the shifting economics from increasing interest rates, the Treasury Department’s recent publication of long-awaited proposed regulations will change the life-expectancy factors used in life expectancy–based estate planning.

The current mortality tables (IRS Table 2000CM) rely on life-expectancy data from 2000, while the new tables will be based on data from 2010 (new IRS Table 2010CM). In general, the life-expectancy calculation under the new tables will assume a longer life expectancy at every age. For example, an individual’s life expectancy at age 70 will increase by a little more than 1.5 years, and an individual’s life expectancy at birth will increase by a little more than two years. As is the case with the current mortality tables, neither the sex nor health status of an individual is factored into calculations using the new mortality tables (other than the fact that certain terminally ill individuals are excluded from use of the tables). 

While these changes may not seem drastic, they should be considered by individuals contemplating the use of life expectancy–based estate planning. Importantly, increased life-expectancy assumptions are favorable to the taxpayer (and/or family, or other beneficiaries) for some types of planning and unfavorable to the taxpayer for other types of planning, depending on which side of the “longevity bet” the taxpayer lands. For most types of planning, when increased interest rates are favorable to the taxpayer, increased life expectancy is unfavorable to the taxpayer.


Planning category

Favorability of increased life expectancy
to taxpayer

Favorability of increased interest rates
to taxpayer

Lifetime Charitable Remainder Annuity Trust (CRAT) or Charitable Remainder Unitrust

Unfavorable

Favorable

Lifetime Charitable Lead Annuity Trust (CLAT) or Charitable Lead Unitrust  (CLUT)

Favorable

Unfavorable

Self-Canceling Installment Note (SCIN) or lifetime private annuity

Favorable

Unfavorable

Qualified Personal Residence Trust (QPRT) with reversion

Unfavorable

Favorable

Split interest purchase

Favorable

Favorable

Charitable gift annuity

Unfavorable

Favorable

 

Fortunately, the proposed regulations allow for the taxpayer to choose which tables to use until the regulations are finalized. The comment period for the regulations ends July 5, 2022, and it will presumably take some time after that to finalize the regulations. Notably, the proposed regulations permit the use of the new mortality tables for transactions dating back to January 1, 2021, so taxpayers who entered into certain types of transactions in 2021 might consider the impact of electing the use of the new tables before filing their 2021 tax returns (or amending a 2021 return if it was already filed).

During this interim period, there are likely some “arbitrage” opportunities for taxpayers to get the best of both worlds. For example, in June 2022 a taxpayer can enter into a lifetime CLAT transaction electing to use the April 2022 IRS “7520” discount rate of 2.2% (far more favorable than the June 2022 discount rate of 3.6%), while also electing to use the new mortality assumptions. Using rough numbers, a 70-year-old individual would use about 25% more gift tax exemption (or pay about 25% more gift tax) to achieve the same economics if the individual used the higher discount rate and the current mortality tables (based on IRS Table 2000CM instead of the new IRS Table 2010CM ).

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John Bunge
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