Iowa Administrative Code › Agency 701 - Revenue Department › Title X - Inheritance Tax › Chapter 900 - Inheritance Tax › Rule 701-900.11 - Valuation-special Problem Areas

Current through Register Vol. 47, No. 3, July 24, 2024
(1)
Valuation of life estate and remainder interests-in general.
Life or term estates and remainders in property cannot be valued separately for
				inheritance tax purposes without reference to the value of the property in
				which the life or term estate and remainder exists. The first valuation step is
				to determine the value of the property as a whole. This rule applies equally to
				fair market value in the ordinary course of trade, whether it be valued at
				death or on the alternate valuation date six months after death, or at its
				special use value under Iowa Code chapter 450B. The second step is to apply the
				life estate-remainder or term tables in rule
				701-86.7 (450) to the whole
				value of the property in which the life estate-remainder or term exists. Iowa
				Code section 450.51 requires that value of annuities, life or term, deferred or
				future estates in property be computed on the basis that the use of the
				property is worth a return of 4 percent per year. The life estate-remainder
				tables in rule 701-86.7 (450) make no
				distinction between the life expectancy of males and females. See
City
				of Los Angeles v. Manhart,
435 U.S.
				702,
				98 S.Ct. 1370, 55 L.Ed. 657
				(1978) and
Arizona Governing Committee for Tax Deferred Annuity and
				Deferred Compensation Plans v. Norris,
51 U.S. Law Week 5243, 77
				L.Ed.2d 1238 (1983) for the requirement that retirement annuities must not
				discriminate on the basis of sex. However, the actual life expectancy of the
				particular person receiving the life estate is not relevant in determining the
				value of the life estate for inheritance tax purposes.
In re Estate of
				Evans,
255 N.W.2d 99 (Iowa 1977), appeal dismissed,
				434 U.S.
				805,
				98 S.Ct. 34, 54 L.Ed.2d
				62.
(2)
Single life estate
				and remainder.
The value of a single life estate and remainder in
				property is computed by first determining the value of the property as a whole.
				The life estate is then computed by multiplying the value of the property as a
				whole by the life estate factor in rule
				701-86.7 (450) for the age of
				the life tenant. The value of property remaining after the value of the life
				estate is subtracted is the value of the remainder interest in the property.
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
				  701-86.7 (450) is .43306; that
				  is, the use of the $320,000 for life at the statutory rate of return of 4
				  percent is worth 43.306 percent of the value of the farm. Niece C's remainder
				  factor is .56694. 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.
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(3)
Joint and succeeding life
				estates.
If property includable in the gross estate is subject to
				succeeding or joint life estates, the following general rules shall govern
				their valuation:
a. There can be no greater
				value assigned to all of the life estate interests than the value of the life
				estate of the youngest life tenant. The value of the life estate of the
				youngest life tenant fixes the value of the remainder interest in the
				property.
b. If two or more persons
				share in a life estate, the life tenants are presumed to share equally in the
				life estate during the life of the older life tenant, unless the will or trust
				instrument specifically directs that the income or use may be allocated
				otherwise.
c. The age of a life
				tenant alone determines the value of that life tenant's interest in the
				property. The life tenant's state of health is not relevant to valuation.
In re Estate of Evans,
225 N.W.2d 99 (Iowa 1977), appeal
				dismissed, 434 U.S.
				805,
				98 S.Ct. 34, 54 L.Ed.62. As a
				result, if a succeeding life tenant is older than the preceding life tenant,
				the value of the succeeding life estate is zero. These general rules can be
				illustrated by the following examples:
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 .43306 $320,000 x
							 .43306 =
$138,579.20
2.
Value of C's Succeeding Life
							 Estate
Life estate factor for age 45 is .71463 $320,000 x
							 .71463 =
$228,681.60
Less: B's life estate
$138,579.20
Value of C's life estate
$ 90,102.40
3.
Value of D's ½
							 remainder
Remainder factor for a life tenant aged 45 is .28537
							 as ½ of $320,000 x .28537 =
$ 91,318.40
4.
Value of E's ½
							 remainder
½ of $320,000 x
							 .28537
$ 91,318.40
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 .64086 (life estate factor, age 52)
							 =
$153,806.40
½ as B's share =
$ 76,903.20
2.
C's share of joint life
							 estate.
$240,000 x .68468 (life estate factor, age 48)
							 =
$164,323.20
Less: ½ value of life estate for B's
							 life
$ 76,903.20
$ 87,420.00
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
							 .31532, based on C's age of 48.
D's share of the
							 remainder.
½ $240,000 x .31532 =
$ 37,838.40
E's share of the
							 remainder.
Same as D's
$ 37,838.40
Total value of joint life estates and the
							 remainder
$240,000.00
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 $76,903.20. 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.