Jim - you can see now why I went into the theory behind that calculations! There's a lot that goes into this issue. (For instance, I can also see that you've run across the matter of incorporating the AFR [Applicable Federal Rate]. That's just one of the complexities of doing these calculations if you aren't able to just reference a table.)
The differences in valuations, especially between the IRS calculations and the tables by agencies such as the DHSH and the arises in great part because of the different purposes of those calculations. The DSHS type calculations are looking at determining what the rough value is of what the party gave away (the remainder interest) so that they can figure that into the formulas for determining whether or not the donor has made too much divestment and might then be ineligible for public benefits for nursing home care. The IRS based computations are trying to pin down values to determine the amount that can be deducted for the charitable gift of a remainder interest. The key variables in the IRS tables include the AFR, but also the rate of depreciation that is incorporated into the calculations. The higher the interest rate assumed, the greater the value of the remainder interest; the higher the depreciation presumed, the lower the value of the remainder interest.
I'm concerned about the accuracy of the number you came up with off the IRS tables. I haven't run the calculations myself, but in one sample run I ran across where the life estate holder was age 65 the remainder interest
was valued at roughly 47% (using a midterm AFR of 3.4%) using the IRS methodology. See here
for that example. That would suggest a valuation of the life estate at closer to 53%.
My concern with using the IRS method for this purpose is that it incorporates depreciation into the value of the property, which basically is a fiction. Most real properties don't actually depreciate. On the other hand, there is an annual cost to maintaining real property, including property taxes, insurance, maintenance, utilities, etc. When giving up the life estate, mom will receive cash, but she will also be relieved of the duty to pay property taxes, property insurance, utilities, maintenance and repairs, at that site. Being relieved of those obligations has a value also, which should be incorporated into the assumptions.
To get an idea of how close to fair or appropriate a 65% valuation would be, I'd like you to estimate the selling value of the property and then figure mom's share of the net proceeds based on 65%. Next, estimate what her cost to live at this property would have been annually (include property taxes, property insurance, utilities, and something for maintenance) at present numbers. Next estimate what her cost to rent a nice apartment would be. The difference in those costs is a fair estimate of what she would bear as an out of pocket cost for not retaining that life estate. Would the money in the bank, paid out annually (I'd use an estimated 3% of it for one year for this calculation), be enough to cover her estimated net excess cost to rent an apartment compared to the estimated cost of living in that house? The concept behind this thought is to say that she was given a gift of housing: how far would that same gift go if it were cashed in and the money was instead was used toward housing in a different venue?
[For example, if the house would sell for a net of $400,000, then 65% would be $260,000. If mom drew 3%, or $7,800, of that $260,000 in the first year, and each year drew an increased amount equal to the rate of return she got on the money, the money would last for approximately 30 years. Would an extra $650 a month cover the approximate difference to her between the cost of renting a nice apartment and the estimated actual cost of living in the house she has the life estate in? If so, then giving up the life estate at that value is reasonable because she is still getting an equivalent gift out of the proceeds: money that could be used to defray her actual living costs somewhere else.]
Unfortunately there are too many variables to be able to give you a valuation from here. But I would be wary about using the IRS valuation method (for determining the applicable charitable deduction of the gift of a remainder interest) because it incorporates a very conservative interest calculation and it incorporates a fictional figure for depreciation. When trying to calculate for a charitable deduction, the party doing the calculations will try to get the highest value possible for the remainder interest to maximize the tax benefit of the gift. That methodology is essentially at odds with the purpose you have here, and doesn't factor in the variables that would be of concern to your parties.
I'm sure that I've thrown more mud into the water, but I am trying to show that the it is not automatically applicable to use the IRS method, which will typically understate the value of the life estate. Also, as mentioned above, I'd like you to do a rough estimate of what your mom's estimated share of the proceeds would do as far as helping to defray her actual housing costs, as a way of estimating what the equivalent value of the life estate when cashed in would be to her: how far would that money go toward her housing costs [since the gift was essentially a gift of housing]?
Finally, I have to come back to the concept that this is a negotiated settlement. While the parties will feel better if they can link the % figures to some authoritative calculations, it still comes down to what it will take to get the job done. The remainderman should keep in mind that if she doesn't give up the life estate, they don't anything until years down the road, and there is no guarantee what the property's value will be then. But at the same time, if they don't agree to let mom sell the property can cash in the life estate, she can't get out from under the obligation to pay taxes, insurance, etc., at this property, and if she is already comfortable living somewhere else then moving to this property may not be something she'd want to do. Negotiations often come down to who is more motivated.
If it were my case, I would present the % figure that is more favorable to mom but still supportable, and let them come back with a counter-offer of a different percent that they think is more applicable. Then you'll know how close the sides are to resolving this informally.
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