Opinion ID: 2114370
Heading Depth: 1
Heading Rank: 8

Heading: valuation of trust interest

Text: Myers also assigns that the county court erred in valuing her interest in the trust. The county court valued Myers' interest in the trust according to the regulations that would be used to calculate, for tax purposes, the present value of a life estate in the trust property. Resolution of this issue requires us to conduct a comprehensive examination of the tax valuation method relied upon by the county court. Neb.Rev.Stat. § 77-2008 (Reissue 1996) provides that [b]equests, devises, or transfers of property or any interest therein in trust or otherwise for the life of the legatee, devisee, or transferee shall be subject to inheritance taxes and that the property or interests therein shall be appraised... at what was the fair market value thereof at the time of the death of the decedent. The fair market value is the present value as determined under the Internal Revenue Code and its applicable regulations. 316 Neb.Admin.Code, ch. 17, § 001.01 (1984). The present value of the annuities, life estates, terms for years, remainders, and reversions is determined under 26 C.F.R. 20.2031-7 (1983) ... or as subsequently revised. 316 Neb.Admin.Code, ch. 17, supra. It is provided in 26 C.F.R. § 20.2031-7 at 313 (1998), in relevant part: [T]he fair market value of ... life estates... is their present value determined by use of standard or special section 7520 actuarial factors. These factors are derived by using the appropriate section 7520 interest rate and, if applicable, the mortality component for the valuation date of the interest that is being valued. Under 26 C.F.R. § 20.7520-1(b)(1)(i) (1998), in order to determine the present value of a life estate, one should utilize a rate of return, rounded to the nearest two-tenths of 1 percent, that is equal to 120 percent of the applicable federal midterm rate, compounded annually, for the month in which the valuation date falls. For estate tax purposes, the date of valuation is the date of the decedent's death. § 20.7520(b)(1)(ii). According to the tables published monthly in the Internal Revenue Bulletin, the appropriate interest rate for December 1996 was 7.59 percent. Rev.Rul. 96-57, 1996-2 C.B. 82. This rate rounds up to 7.6 percent. See § 20.7520-1(b)(1)(i). Based on this rate, the single life remainder factor, where the life estate is measured by the life of a 44-year-old person, is .13873. § 20.2031-7(d)(6), table S. In order to determine the present value of the life estate, the correlative single life remainder factor is subtracted from 1.000000, and the resulting actuarial factor is multiplied by the value of the property. § 20.2031-7(d)(2)(iii). In the present case, the resulting actuarial factor is .86127. See id. See, also, § 20-2031-7(d)(5), example 1 (providing example of valuation method for income interest in property). Based upon that actuarial factor, the present value of Myers' interest in the trust, for estate tax purposes, rounded to the nearest cent, was $5,230,546.11. Based upon those calculations, since the present value of Myers' interest in the trust exceeded 50 percent of the augmented estate, the county court determined that the elective share amount had been fully satisfied by Myers' interest in the trust and that she was entitled to no further compensation. Myers does not argue that the county court erred in its calculations under the tax valuation method; rather, she claims error in the very use of the tax valuation method. Myers does not claim, for instance, that the county court relied upon the wrong regulations or mortality tables or interest rate calculations, or that the court made a mathematical mistake. In other words, Myers claims that the tax valuation method is itself inadequate under the circumstances but does not assign error to any particular aspect of the process used in the instant case. Myers' contention on appeal is that the tax valuation method resulted in an overvaluation of her interest in the trust. Primarily, she notes that at the time of the valuation, much of the trust principal consisted of Transcrypt stock, which at that time was paying no dividends and generating no income for Myers. Thus, Myers claims that the assumption of an income stream of 7.6 percent dramatically overstates the actual return to her as the income beneficiary. Even assuming this to be the case, we are unpersuaded by Myers' contention that some different method should have been used to calculate the actual value of her income interest in the trust. We first note that although Myers has suggested that some alternate method of valuation be used, she has neither proposed such a method nor directed us to any authority that would be helpful in creating one. Myers clearly states that the goal of the valuation should be to predict the actual income of the trust, but she offers no means for achieving this goal, much less a means more appropriate or persuasive than the method used in the instant case. Under such circumstances, Myers has not met her burden of demonstrating error on the record of the county court. Moreover, we note that the Supreme Judicial Court of Maine used a similar method in a case presenting similar issues. See In re Estate of Fisher, 545 A.2d 1266 (Me.1988). In that case, the court established the present value of a trust interest providing a fixed income by treating it as an annuity under the appropriate federal tax regulations. Id. We do not hold that the tax valuation method is the only appropriate method for valuing the present value of beneficial interests in elective share proceedings. We simply determined that under the facts presented in the instant case, the county court did not err in using the tax valuation method as the basis for its judgment. While we recognize that this method is at best imperfect, [t]he whole problem of valuing individual life interests by resort to mortality tables is at best a matter of educated guesswork. The courts cannot demand perfection in an area so fraught with speculation and uncertainty. McMurtry v. Commissioner of Internal Revenue, 203 F.2d 659, 666 (1st Cir.1953). We are not persuaded that under the circumstances, any other method would have provided a better assessment of the present value of Myers' interest in the trust, given that the trust principal can at any time be invaded by the trustee for Myers' support. While the tax valuation method of valuing the present interest of a beneficial interest in a trust may carry the risk of overvaluation of the trust interest, under § 30-2319 the surviving spouse has the option of avoiding that risk by renouncing the benefit of the trust. See Neb.Rev.Stat. § 30-2352(c) (Reissue 1995). Valuation only becomes necessary when the surviving spouse attempts to claim both an elective share and the benefit of a trust, at which point the risk of overvaluation is properly borne by the surviving spouse. Thus, we determine that the county court did not err in calculating the present value of Myers' interest in the trust. While by no means perfect, the tax valuation method utilized by the county court is grounded in well-reasoned authority and provides for sensible and consistent results under these circumstances. Accordingly, we find Myers' second assignment of error to be without merit.