Journal eglamkowski's Journal: That's just nuts! 3

Jane Porter transferred $300,000 to a trust. The trust instrument requires that the trustee pay $1,500 to Alfred Porter on the last day of each month in each year until Alfred's death. Alfred was born 60 years before Jane's transfer. Upon Alfred's death the remaining trust funds are to be paid to Jane. What is the value of the gift to Alfred? Assume the section 7520 rate is 7% per annum.

Start with the Table S fraction given in Reg. 20.2031-7(d)(7) for someone age 60 and using 7% = .30500

Calculate the annuity factor: (1 - .30500) / 7% (don't ask why, just accept it)

Table K adjustment = (annuity factor) * 1.0317

Gift to Alfred = ((1 - .30500) / 7%) * 1.0317 * $1,500 = $15,364.96

With a $12,000 annual gift tax exclusion, there would only be gift tax due on $3,365. Factor in the one million dollar unified credit, and this guy's getting $1,500 a month for life and there's no gift tax due, or if the unified credit has already been used, at virtually no gift tax (even if the 45% rate applies, that's still peanuts for a LIFETIME annuity of $1,500 a month!).

But the thing that's most nuts about this is just simply the equation used to determine the value of the gift to Alfred. Annoyingly complex actuarial based formulation...