Iowa Admin. Code r. 701-86.11
The computation of the value of a single life estate and remainder in property is illustrated by the following:
Example: Decedent A, by will, devised to surviving spouse B, aged 68, a life estate in a 160-acre farm, with the remainder at B's death to niece C. Special use value and the alternate value were not elected. The 160-acre farm at the time of the decedent's death had a fair market value of $2,000 per acre, or $320,000.
computation OF B's LIFE ESTATE: The life estate factor for a life tenant aged 68 under 701-867. (450) is.37936; that is, the use of the $320,000 for life at the statutory rate of return of 4 percent is worth 37.936 percent of the value of the farm. Niece C's remainder factor is.62064. The life estate-remainder factors when combined equal 100 percent of the value of the property. It is the age of the life tenant which governs the value of the remainder The age of the person receiving the remainder is not relevant.
Value of B's Life Estate$320,000 x.37936 = $121,395.20
Value of C's Remainder$320,000 x.62064 =$198,604.80
Total Value $320,000.00
Example 1. Decedent A, by will, devised a 160-acre farm to surviving spouse B, aged 68, for life, and upon B's death, to daughter C, aged 45, for life, and the remainder upon C's death to nephews, D and E, in equal shares. The 160-acre farm had a fair market value at A's death of $320,000. Neither the alternate valuation date nor special use value was elected.
computation OF THE SUCCEEDING LIFE ESTATES AND REMAINDER
1.Value of B's Life Estate:
Life estate factor for age 68 is.37936
$320,000 X.37936 = $121,395.20
2.Value of C's Succeeding Life Estate
Life estate factor for age 45 is.67131
$320,000 X.67131 = $214,819.20
Less: B's life estate$ 121,395.20
Value of C's life estate $93,424.00
3.Value of D's V2 remainder
Remainder factor for a life tenant aged 45 is.32869
as 1/2 of $320,000 x.32869 = $ 52,590.40
4.Value of E's V2 remainder
1/2 of $320,000 X.32869$ 52,590.40
Total Value - life estates and remainders $320,000.00
Note: In this example, the value of C's succeeding life estate is reduced by the value of B's preceding life estate because C does not have the use of the farm during B's lifetime. The value of the remainder to D and E is fixed by the age of C, the succeeding life tenant.
Example 2: Joint and survivorship life estates and remainder. In this example, the estate elected both the alternate valuation date and special use value. This is permitted by Federal Revenue Ruling 83-31 (1983) if the gross estate and the real estate are otherwise qualified.
Decedent A, a widow, by will devised her 240-acre Iowa farm to her nephew, B, aged 52, and the nephew's wife, C, aged 48, for their joint lives and for the life of the survivor, with the remainder to D and E in equal shares. The farm had a fair market value at death of $2,200 per acre, or $528,000; the alternate value of the farm six months after death was $2,100 per acre, or $504,000. Its special use value is $1,000 per acre or $240,000. The life estates and the remainder are computed on the basis of the special use value of $240,000.
computation OF JOINT LIFE ESTATE - REMAINDER VALUES
1.B's share of joint life estate.
$240,000 X.59399 (life estate factor, age 52) = $142,557.60
1/2 as B's share = $71,278.80
2.C's share of joint life estate.
$240,000 X.63966 (life estate factor, age 48) = $153,518.40
Less: 1/2 value of life estate for B's life $71,278.80$ 82,239.60
3.Value of the remainder
The value of the remainder is computed by using the remainder factor at the age of the youngest life tenant. In this example, it is.36034, based on C's age of 48.
D's share of the remainder.
1/2 $240,000 X.36034 = $ 43,240.80
E's share of the remainder.
Same as D's$ 43,240.80
$240,000.00
Total value of joint life estates and the remainder
Note: In this example, B and C share equally in the life use of the farm during the life of B, who is the eldest. As a result, each life tenant's share during B's life is worth $71,278.80. Since C is younger than B, the difference between the value of the life estates for B and C is set off to C alone. The age of the youngest life tenant (C in this example) fixes the value of the remainder interest in the farm.
This subrule is illustrated by the following examples:
Example 1. Decedent A devises a 240-acre farm to daughter B, with the provision that B pay the sum $5,000 per year to C for life. The farm is subject to a lien as security for the payment of the annuity. C, the annuitant, is 54 years old. The fair market value of the farm at A's death is $2,000 per acre, or $480,000. Neither special use value nor the alternate valuation date was elected.
computation OF THE VALUE OF THE $5,000 ANNUITY AND THE REMAINDER REVERSON TO B.Under rule 86.7(450) the 4 percent annuity factor for life at age 54 is 14.245 for each dollar of the annuity received. Therefore, C's life annuity is computed as follows:
C's Annuity
$ 71,225
$5,000 X 14.245 =
B's Reversionary - Remainder Interest
$480,000
Value of farm
$71,225$408,775
Less: C's annuity
$480,000
Total annuity and reversion - remainder
Note: In this example, the $5,000 annuity is worth less than a life estate in the farm. A life estate would be worth $273,499.20 because the use of $480,000 at 4 percent per year would return $19,200 per year, which is much greater than the $5,000 annuity.
Example 2: Decedent A, by will, directed that the sum of $100,000 be set aside from the residuary estate to be held in trust to pay $500 per month to B for life and upon B's death the remaining principal and income, if any, is to be paid to C and D in equal shares. B, the annuitant, was 35 years old at the time of A's death.
Under rule 701-867. (450), the annuity factor for a person 35 years of age is 19.048 for each dollar of the annuity. The annuity factor is multiplied by the annual amount of the annuity, which in this case is $6,000 per year
computation OF THE PRESENT VALUE OF B's $6,000 ANNUITY
$500.00 X 12 = $6,000 X 19.048 = $114,288, which exceeds the value of the property funding the annuity. As a result, the value for inheritance tax purposes is $100,000, the maximum amount allowed by subrule 86.11(4). The remainder to C and D has no value for inheritance tax purposes.
These rules can be illustrated by the following examples:
For an example of computing remainder interests, see Examples 1 and 2 in 701-subrule 86.11(3).
Example 1: Decedent A died July 1, 1993, and, by will, devised all of her personal property to her surviving spouse, B, and her 240-acre Iowa farm to B for his life with the remainder at B's death to two nephews, C and D, in equal shares. The surviving spouse, B, was 74 years of age when A died. The fair market value of the 240-acre farm was $2,000 per acre, or $480,000 on the date of A's death. Neither the alternate valuation date nor special use value was elected by the estate. On March 15, 1994, the tax on B's life estate was paid. The tax on the remainder to C and D was therefore deferred, to be paid no later than nine months after the death of B, the life tenant. However, on October 15, 1995, due to adverse economic circumstances, B, C, and D voluntarily sold the 240-acre farm at public auction to an unrelated person for $2,100 per acre, or $504,000. B's life estate was not preserved in the sale proceeds. The tax on the remainder in this fact situation must be computed under subrule 86.11(5), paragraph"b, " when the life estate is terminated before the life tenant's death. The sale price of the farm and the life estate remainder factor reflecting B's age on October 15, 1995, (B's age is now 76) control the value of the remainder
computation OF THE REMAINDER INTEREST OF C AND DThe remainder factor in rule 86.7(450) for a life tenant aged 76 is.73595.
C's 1/2 remainder interest'A ($504,000 x.73595) = $185,459.40
D's 1/2 remainder interestsame as C's185,459.40
Total value of remainder $3 70,918.80
Note: In this example, the value of C and D's remainder interest in the sale proceeds is greater than the value of the remainder at the time of A's death due to the increase in the remainder factor because of B's increased age and the increase in the fair market value of the farm. However, if B's life estate had been preserved in the sale proceeds, the tax could continue to be deferred on C and D's remainder interest. C and D cannot be required to pay the tax on their remainder until they come into possession or enjoyment of the property.
Example 2: Decedent A at the time of her death on July 1, 1993, owned a vested remainder in a 240-acre Iowa farm, which wassubject to the life use of her mother, B, who was 87 years old when A died. A's ownership of the remainder interest was not discovered until after life tenant B's death on October 15, 1995. The fair market value of the farm was $2,000 per acre or $480,000 on July 1, 1993, and $2,200 per acre or $528,000 on October 15, 1995. Neither the alternate valuation date nor special use valuation can be used in this fact situation. See rule 86.10(450) and subrule 86.8(4), paragraph"c. " A's estate was reopened to include the omitted remainder in the 240-acre farm. An amended inheritance tax return was filed December 10, 1995, basing the tax on the fair market value and the remainder factor corresponding with the life tenant's age (87) on July 1, 1993. In this fact situation, the tax on A's remainder is not computed correctly, even if A's estate has offered to pay a penalty and interest on the tax due. The tax must be computed on the basis of a fair market value of $2,200 per acre and a remainder factor of 100 percent of the value of the farm. No penalty or interest would be assessed if the correct tax is paid prior to July 15, 1996, which is nine months after the life tenant's death. The life tenant's age at death is not relevant.
This rule is illustrated by the following example.
comprehensive Example: Decedent A, by will, devised a 240-acre Iowa farm to B for life and upon B's death, then to C for life and the remainder after C's death to D and E in equal shares. In this example, C's succeeding life estate is contingent upon surviving B, the first life tenant. If C elects to pay the tax on the succeeding life estate within nine months after A's death, the tax is computed according to Example 1 in subrule 86.11(3) with no discount for the contingency that C may not survive B. However, C may defer the tax to be paid no later than nine months after B's death. In this case, if C does not survive B, the succeeding life estate lapses, and D and E who own the remainder will come into possession or enjoyment of the 240-acre farm. No tax will be owing on the succeeding life estate because C receives nothing. D and E will owe tax on the remainder within nine months after the death of B, if the tax was not previously paid.
For another example of computing a contingent remainder interest seeIn re Estate of Schnepp, 258 Iowa 33, 138 N.W.2d 886 (1965).
Example: The decedent grew crops consisting of corn and beans. The decedent died August 15. The decedent lived 92 days of the growing season. In the fall of the year, 2,000 bushels of corn were harvested by the estate and sold to the local elevator for $3.10 per bushel. The value of the crop for the purpose of Iowa inheritance tax purposes is calculated as follows:
92/153 x 2000 bushels x $3.10 per bushel = $3,728.10
This valuation formula is to be utilized whether the decedent is the lessor or lessee of such property.
This rule is intended to implement Iowa Code sections 450.44 to 450.49, 450.51 and 450.52.
Iowa Admin. Code r. 701-86.11