used as a basis for the calculations instead of the expectation of life. § 324. Case of an Annuity If the will directs that an annuity is to be purchased outright, its value is a specific amount to be deducted as a legacy with its tax from the residuary estate. 6 The present value of an annuity of a definite amount during life is computed, as has been said, on the basis of the expectancy of life. For example, an annuitant is to receive under the terms of his father's will an annuity of $1,000 during life. At the time of his father's death he is 40 years old. In New York the present worth of such an annuity would be found from the American Experience Table at 5 per cent. The expectation of life at 40 is 28.18. The present worth of $1 per annum for 28.18 years is $13.716. If the annuitant was to receive $1,000 per annum, the present worth would be $13,716. On this amount he would be taxed. The present worth of an annuity of a definite amount during the lifetime of another person must be computed on the basis of the expectancy of life of that other person. This would be the case if a man left his property to his wife during her life, but directed her to give each of his daughters the sum of $1,200 per annum. If the annuity is for a definite number of years, the expectancy of life does not enter the matter, but the present worth of the annuity for that number of years is calculated. Where a testator left a life estate in about $100,000 of personal property, to his widow, subject, though, to an annuity of $200 to be paid his sister, aged 58, for her life and to the payment of $125 and house rent to his brother aged 66 for his life, it was held proper in calculating the present value of the widow's life estate for the purposes of the transMatter of Maresi, 74 App. Div. (N. Y.) 76. fer tax, "to deduct from the net value of the personal prop- § 325. Hypothetical Annuities In the case of estates in which the tenant is entitled to receive, instead of a definite amount, the entire income of a certain property during his own life, the life of another, or for a term of years, the rate of income being fixed by the instrument creating the trust or being definitely determinable at the time of the decedent's death, the average annual income which the property annually yields is determined and the present worth of that income computed as explained above in the case of annuities. For example: The annuitant's father placed $100,000 in trust, with directions that it be invested in state and municipal bonds and the entire income paid to him during the life of his elder brother, who was 41 years old at the time of the decedent's death, at which time the money was already invested in state and municipal bonds, and was actually yielding a net return of $5,000 per annum. In this case the rate of income is definitely determinable. If the rate of annual income is not determinable, or the tenant is entitled merely to the personal use of non-incomebearing property, a hypothetical annuity is made the basis of the calculation. For this purpose the laws of the different states use different percentages of the value of the property. If an estate should be assessed before the fund from which a tenant is to receive the income during the life of another has been invested by the trustee, the value of a hypothetical annuity may be found by using the rate prescribed for such cases in the particular state. 7 Matter of Hutchinson, 105 App. Div. (N. Y.) 487. § 326. Value of Remainders The present worth of a remainder interest subject to the life estate of another may be obtained by multiplying the value of the property by the figure in the column of the table used that gives the remainder value of $1 after the number of years representing the expectation of life of the life tenant. If the remainder interest is subject to an estate for a term of years, that should be used in finding the value of $1. In some cases, however, it may be necessary to modify the above procedure in order to follow the state law. The law in force at the death of the testator governs the taxation of remainders and not the law in force at the time the remainders vest.8 REVIEW QUESTIONS 1. Define "tenant for life," "tenant for years," "remainder," "remainderman." What is done for the tenant for life or for years in regard to real estate? What if the estate is in personal property? What is an annuity? 2. How are inheritance taxes apportioned on the different estates that have been named? Who pays them first? Who must pay ultimately? If circumstances change before the remainder takes effect so as to reduce the amount of tax, what is done by the state? How is an annuity valued? How is the tax repaid from the annuity? 3. How are the values of all the estates mentioned valued? What mortality table is used in your state? 4. How are mortality tables compiled? How is the present worth of an annuity found? 5. On what amount would the annuitant in the first paragraph of § 324 be taxed in your state? What would be the present worth of an annuity of $1,200 per annum for 15 years, in your state? 6. When the legatee is to receive the entire income of a property for life or a term of years and the rate can be ascertained, what State ex rel. Basting v. Probate Court. 132 Minn. 104. is the procedure? In the case given in § 325, what would be the amount on which the transfer tax would be calculated in your state? What is done in your state where the amount of income cannot be definitely ascertained? 7. How do you find the remainder value after a life estate in your state? Suppose the remainderman to be entitled to receive property worth $50,000 upon the death of an elder brother to whom the income for life was bequeathed, the brother being 41 years old. Work out the value of the remainder under your state law. CHAPTER XXXVII FEDERAL ESTATE TAX $327. Nature of the Law The federal estate tax at present in force is based on Title IV of the Revenue Act of 1918. It differs from all previous transfer laws and from most of the state inheritance tax laws in that: The tax is not laid upon the property, but upon its transfer from the decedent to others. The subject of tax is the transfer of the entire net estate, not any particular legacy, devise, or distributive share. It is not an individual inheritance tax. The value of the separate interests and the relationship of the beneficiary to the decedent have no bearing upon the question of liability or the extent thereof. The transfer of property is taxable, although it escheats to the State for lack of heirs.1 As has been shown above, the features which especially distinguish the federal act from most of the state laws are that the tax is levied on the whole amount of the net estate without reference to the relation of the legatees or heirs to the decedent, and applies to both real and personal property. The tax is on the estate as a whole, and as a consequence, where there is a will the specific legacies are not affected and the whole amount of the tax comes out of the residuary legatees.2 There is no tax on estates of a net value of less than $50,000, but above that figure the tax increases progressively with Article of Regulations 37, Bureau of Internal Revenue. The validity of the last provision may well be questioned. In fact, many features of the law and the regulations under which it is enforced have not yet been passed upon by the supreme court. The regulations are, however, at this time almost the only authoritative interpretation of the law, and although they are binding until overruled they are not necessarily final. A copy of Regulations 37 should be secured from the nearest office of the Bureau of Internal Revenue. Its provisions go fully into all details relating to estate taxes. 2 Matter of Hamlin, 226 N. Y. 407. |