Annuities in legal contexts
Valuation of annuities is often an issue in legal
contexts, such as in computing the taxes on a
state lottery jackpot, or valuing a pension in
an equitable distribution, or valuing an annuity
contract for estate tax purposes.
Valuation often turns on legal policy. Consider
the case of John Hance, who owned an annuity contract
that provided for payment during his lifetime
and then to his widow for her life. John died
on February 15, and his wife Mabel died on May
15. What is the value of John's annuity contract
for estate tax purposes?
- the value on the date of John's death of the
payments to be received by Mabel on the basis
of her life expectancy, discounted to reflect
a reasonable rate of return - $44,633
- the value of similar annuity contracts issued
on the date of John's death to a female applicant
of the same age as Mabel - $121,905
- the value of payments received by Mabel between
John's death and hers - $5,007
- the value of the annuity contract one year
after John's death, a valuation date the estate
may choose under IRC S 2032, which because of
Mabel's death made the annuities worthless -
The Tax Court's answer: $5,007. The Tax Court
interpreted IRC § 2032, which permits the
estate to make "adjustment for any difference
in its value as of [one year after death] not
due to mere lapse of time," to take
into consideration Mabel's death. Although the
annuity had become "totally worthless"
at the one year mark because of her death, it
did have value "due to mere lapse of time"
during the period she had "merely remained
alive" after John's death and before hers.
See Estate of Hance v. Commissioner,
18 TC 499 (1952), acquiesced, 1953-1
Hitting the Jackpot
In 1992, Bronx residents Edison and Salvadora
Blanco won $10 million in the New York State Lotto.
Under the lottery rules, Mr. Blanco was entitled
to one initial payment of $476,100.00 and 20 subsequent
annual payments of $476,195.00.
To fund the installment payout obligation, the
Lottery purchased an annuity for $4,724,421.26.
Gribauskas won a $16 million state lottery -
to be paid in 20 annual installments of $800,000.
The right to installment payments could not be
transferred or accelerated. Two years later, Gribauskas
died. What was the value of the prize to his estate?
Actuarial tables in IRC Sec 7520 placed the value
at $3.5 million. The estate discounted the prize
because of its restrictions to $2.6 million.
Should the prize be valued using actuarial tables
or reduced to reflect the lack of transferability?
Gribauskas, -- F.3d -- (2d Cir 2003). Shakelford
v. US, 262 F.3d 1028 (9th Cir. 2001) (Need not
use tables if another valuation method is more
realistic and reasonable).