CHAPTER XXXVI

ESTATES FOR LIFE OR FOR YEARS-REMAINDERS AND ANNUITIES

§ 320. Use of Terms

If a property, a house, shares of stock, or an amount of money, is left by will to a tenant for life or for a certain term of years, the will must also designate who is to take the property when the life interest or the term of years is ended. The estate in the property after the limited tenancy is ended is called the "remainder," and the person taking it is called the "remainderman."

If the property is real estate, the tenant for life or for years is put into actual possession. If, however, the property consists of securities, bonds, or money, it is left to trustees, who hold the property, pay all taxes and expenses, collect interest, dividends, or other profit, and pay the net return to the tenant. Such an estate for life or years gives the right to use or to receive whatever income there may be from certain definite property or a certain amount of money, but these estates may be limited further so as to give the income from the established fund or property only up to a specified amount.

An annuity, on the other hand, gives the legatee an income of a certain amount periodically rather than the indefinite proceeds from a certain amount. It has been defined as "a bequest of a certain sum of money payable periodically for a certain length of time." 1 An annuity, like a life estate and an estate for years, may thus be for life or for a term of years.

1 Baugh and Schmeisser, Theory and Practice of Estate Accounting.

§ 321. Taxability of Such Interests

Life estates, estates for years, annuities, and remainder interests, all have values which are taxable. It might seem that all the assets that are transferred are included in the remainder, but state laws consider the bequest of the life interest as a legacy having a separate value and therefore taxable. On the other hand, the bequest of the remainder is not taxed at the full value of the assets because the "present value" of assets not to be received until some date in the future, is not considered as much as the value of the same legacy due immediately.

In New York the taxes on such interests are paid at once out of the body of the estate by the trustee holding the funds, but are ultimately collectible from the tenant, annuitant and remainderman. If it is uncertain to whom the remainder is to go, the tax is computed at the highest rate applicable, and if later it should be found that the remainder passes to someone entitled to a greater exemption, a refund is made by the state.

The purpose of the statute is not obscure. The purpose is to put at once into the treasury of the state the largest sum which in any contingency the remaindermen may have to pay. The remaindermen do not suffer, for when the estate takes effect in possession there will be a refund of any excess.'

In some states the courts suspend payment of taxation on a contingent remainder until it is certain who is to receive it.3

An annuity charged against an estate is valued on the basis of the probable duration (as shown by mortality tables) of the beneficiary's life. The tax is then paid at once by the trustee in charge. If the expectation of life on which the tax was based was eight years, one-eighth of the tax would be deducted from the annual payment and added to the residuary

Matter of Parker, 226 N. Y. 260.

Security Trust Co. v. Edwards, oo N. J. L. 579.

estate. If the annuitant should die before the tax is repaid, the residuary estate will have to stand the loss.*

Future estates are to be valued by deducting the value of the precedent estate, determined by the method and standard of the mortality tables.

§ 322. How Values Are Calculated

The values of all such interests are calculated by the aid of tables used by life insurance companies to determine the expectation of life at different ages. The determination of the values is a problem in actuarial science. The calculations required may be somewhat complex, in which case the services of an actuary or a thorough accountant will be necessary.

The mortality tables used are known as "The Actuaries Combined Experience Table," "The American Experience Table" and "The Carlisle Table of Mortality." In using these tables it is necessary to know which is adopted in the particular state and what rate of interest is used in such computations in that state. The rate for these calculations is not necessarily the same as the legal rate of interest in business transactions.

The tables on pages 324 and 325 are those used by the government, and are taken from Article 20 of Regulations 37 of the Bureau of Internal Revenue relating to estate taxes.

Mortality tables show, on the basis of statistics averaged from many thousands of individual cases, how much longer a person of any age may be expected to live. Knowing this average expectation of life, it is only a matter of calculation to determine the amount that, at a given rate of interest, would be worth as much now to the annuitant or the tenant as the

Matter of Tracy, 179 N. Y. 501.

The standard text on this subject is "The Accountancy of Investment," by Charles E. Sprague.

TABLE A

Table, Single Life, 4 Per Cent, Showing the Present Worth of an Annuity, or Life Interest, and of a Reversionary Interest

To find the present worth of an annuity of a given amount for life, multiply the annuity by the figure in column 3, Table A, opposite the age at the nearest birthday of the person receiving the annuity.

To find the present worth of a remainder interest in property subject to the life tenancy of another, multiply the value of the property at the time of death by the figure in column 4 of Table A, opposite the number of years nearest to the age of the life tenant at death of testator. Where, however, the remainder interest is subject to an estate for a term of years, Table B should be used.

amount to be received in instalments over the term set. Just as easily is it possible to calculate the present worth of the remainderman's interest, i.e., the equivalent to the larger amount he will receive later. The calculations and annuity tables are based on various rates of interest. Since each state provides by statute the interest rate to be adopted (usually 4, 5, or 6 per cent), care must be taken to use the proper table.

As the expectation of life is an average, it may happen that the annuitant or tenant for life may die within the next year or live for many years in excess of the average. This may be to the advantage or detriment of the remainderman, but the state is not concerned in adjusting this.

If the annuity or interest is for a definite term of years rather than for the life of a person, that length of time is