Life Expectancy Is Not a Guarantee
Our Client Services staff regularly takes client calls that go something like this:
Client: I think your software is giving me the wrong deduction.
PG Calc Client Services: Can you please explain what you mean?
Client: Sure. My donor is 75 years old, so her life expectancy is 11.1 years using the 2000CM mortality table. I know the deduction calculation uses the 2000CM table but when I compute the deduction for a 5% unitrust with a fixed term of 11.1 years, I get a lower deduction than when I compute the deduction for the same unitrust that lasts for my donor’s lifetime. That doesn’t make sense!
It does, actually. Let me explain.
A life expectancy is not a guarantee that a person will live a specific number of years. Instead, it means that out of a large number of people who are all that person’s age, half will outlive their life expectancy and half won’t. A specific person’s life expectancy says little about how long that person will live. Our client’s 75 year-old donor might die next year, in 30 years, or somewhere in between. The odds that she will die in any particular year is actually quite small.
Now, let’s return to the phone call. When our client computed the deduction for a 5% CRUT with a fixed term of 11.1 years, her Planned Giving Manager (PGM) software computed the deduction based on the unitrust lasting for exactly 11.1 years, no more, no less. Her software made a very different calculation when she told it the unitrust will last for the remaining lifetime of a 75 year-old. In this case, PGM used the 2000CM mortality table to determine the probability the donor will live to receive payments each subsequent year. Incorporating these probabilities into the calculation results in a different deduction amount than for a fixed term, even one that matches the donor’s life expectancy. The same would be true for any planned gift that allows terms based on lives or on a fixed number of years.
Which of the two deductions is higher depends on several factors, including the age(s) involved, trust payout rate, and IRS discount rate. You’ll have to run the numbers to get the answer in a specific case. The one thing I can almost guarantee is that the two deductions will not match.