Rev. Rul. 77-471

Advice has been requested as to the applicable method to be used under section 2031 of the Internal Revenue Code of 1954 to determine the present value of a unitrust interest that is includible in a decedent's gross estate in the circumstances described below.

B was the income beneficiary of a qualified charitable remainder unitrust created by the will of A, who had died on October 9, 1974. The terms of the trust require the trustee to pay a unitrust amount equal to five percent of the net fair market value of the trust assets valued annually as of the first day of the trust's taxable year. Payments are to be made in quarter-annual installment, on the last day of the quarter, during the life of B.

The trust provides further that the obligation to make the unitrust payments commences on the trustor's death. Actual payments, however, may be deferred until the end of the taxable year of the trust in which the trust is completely funded. The terms of the trust specify that the method in section 1.664-1(a)(5)(ii) of the Income Tax Regulations shall be used to retroactively determine the unitrust amount due for the period during which payments are deferred.

B died on March 23, 1976, before the charitable remainder unitrust was funded. No unitrust amounts were paid prior to B's death. On March 23, 1976, the net value of the assets available to fund the trust was 100x dollars. The period between the deaths of A, the trustor, and B, the income beneficiary, was 1 year and 166 days.

The question presented is what amount is includible in B's gross estate for the value of the deferred unitrust payments that the trust was obligated to pay until B's death, and which are now due B's estate.

Section 2031 of the Code, and the regulations thereunder, provide for the valuation of property interests includible in a decedent's gross estate. Section 20.2031.10 of the Estate Tax Regulations describes methods for the valuation of annuities, life estates, terms for years, remainders, etc., for estates of decedents dying after December 31, 1970. These methods are used only to determine the present value of benefits to be received in the future and are not applicable here to determine the deferred amount due B. The calculation of the deferred amount must be made in accordance with the terms of the trust.

The trust incorporates the method contained in section 1.664-1(a)(5)(ii) of the Income Tax Regulations for retroactively computing the value of the decedent's right under these circumstances. The regulation provides, in part, that when an income beneficiary dies before receiving any distribution from a unitrust, the amount to which the deceased (or the deceased's estate) is entitled may be determined by multiplying the value of the trust property as of the beneficiary's death by--

(b) A factor equal to 1.0 less the factor under the appropriate payout rate in column 2 of Table D in sec. 1.664-4(b)(5) opposite the number of years in column 1 between the date of death of the decedent and the date . . . of the death of the last recipient. . . .

If the number of years between the date of death and date of . . . the death of the last recipient . . . is between periods for which factors are provided in Table D, a linear interpolation must be made.

The "appropriate payout rate" referred to in section 1.664-1(a)(5)(ii)(b) is the adjusted payout rate defined in section 1.664-4(b)(2) of the regulations. See example 6, section 1.664-1(a)(6). The adjusted payout rate is determined by multiplying the fixed percentage specified in the trust instrument by the appropriate payout factor in Table F (in section 1.664-4(b)(5)) which corresponds to the number of months by which the valuation date for the first full taxable year of the trust precedes the first payout date of such taxable year.

In the present case, the fixed percentage payout rate is five percent. The valuation date is the first day of the taxable year of the trust. The unitrust payments were to be made in quarter-annual installments based upon the taxable year of the trust. The number of months between the valuation date and the end of the first quarter in the first full taxable year of the trust is more than 2 months but less than 3 months. Therefore, the appropriate adjustment factor from Table F is .969059. This factor multiplied by the five percent payout rate yields an adjusted payout rate of 4.845.

Table D of section 1.664-4(b)(5) of the regulations does not list factors for an adjusted payout rate of 4.845, nor are factors listed for a term of 1 year and 166 days. For this reason, the factor in the present case must be determined by interpolation between adjusted payout rates and between years.

Section 1.664-4(b)(3) of the regulations demonstrates the method for interpolation between adjusted payout rates. The computation is as follows:

                       Computation for 1 year

 1.0 minus .905448 (factor at

Accordingly, the value of the deferred unitrust payment which is includible in B's estate equals 6.9417x dollars.