New IRS Life Expectancy Tables Creates “Arbitrage” Opportunity
From: Sterling Foundation Management
Recent IRS actions may create an opportunity to receive a premium price for your charitable remainder trust interests.
On June 1, 2023, the IRS finally adopted “new” mortality tables. We place the word “new” in quotation marks because the tables in question are based on 2010 data.
The world has changed drastically since 2010, and so the IRS’s new tables are hopelessly optimistic. Unfortunately, real world life expectancy has plummeted. In other words, these new IRS tables are yesterday’s news. They are also the law.
That is good news for some people, and bad news for others.
The new tables are great news for people who own income interests in an existing charitable remainder trust.
Value of an Income Interest
The income beneficiary of a charitable remainder trust typically owns the right to receive income from the trust for the rest of that beneficiary’s life, and the life of a spouse if there is one.
The value of that right therefore depends on how long those lives will last.
No human being knows how long those lives will last. That is why we have actuarial science. Scientific inquiry designed to answer the question goes back to at least 1693 when Edmund Halley (who discovered the comet named after him) published the first known mortality table. (Some historians assign credit to John Graunt a few years earlier.)
In the United States, the Actuarial Society of America began in 1889, with 38 members. In 2022, the society reported 32,649 members. In case you’re wondering, that works out to about 1 per every 10,000 Americans. (I don’t think you were wondering, but I’m a bit surprised there are that many. For comparison, there are about 330,000 personal financial advisors in the US, according to Bureau of Labor Statistics.)
New IRS Tables
On June 1, 2023, the IRS adopted Table 2010CM as the official table to use for calculating the life expectancies associated with charitable remainder trusts.
For legal purposes, it does not matter whether the table is accurate. It is the law.
The table may have been accurate as of 2010, which is when the data in the table are from. The table is based on data gathered in the 2010 Census.
As we all know, a lot has happened since 2010. And on the mortality front, most of it is not good.
The IRS is constrained by the rules imposed on it by Congress. That is why the IRS uses 2010 data.
But non-government actuaries are not so constrained.
Life Expectancy Has Peaked and is Declining
Data recently published by Johns Hopkins University show that US life expectancy peaked in 2014 at 78.9 years.
In seven short years, US life expectancy plummeted by 2.8 years, to barely 76 years. That is the sharpest drop in US life expectancy since the time around WWI.
The reasons for the drop are not well understood. And there is unfortunately no reason to believe that the trend will reverse.
Opportunity to Take Risk Off the Table, Above Fair Value
For most of our lives, we could count on life expectancies remaining at least as long as they were, if not growing.
But those happy days are gone.
For those who own assets, such as income interests in charitable remainder trusts, that depend on life expectancies, the new IRS tables may present a golden opportunity.
To the extent that your income interest can be sold based on life expectancies in IRS table 2010CM, and to the extent that those life expectancies are too long (compared to more modern tables) you may be able to eliminate actuarial risk on an important asset, and get paid at very top dollar.
