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Saturday, February 11, 2006


The good news - you've won the lottery!

The bad news - you died before you received 1/2 of the annual payouts of $209,000.

More bad news - the IRS wants a bite out of your winnings for estate taxes before they pass to your heirs.

In valuing lottery annuities to compute the estate tax, the IRS uses its annuity tables (which are actuarial tables based on applicable interest rates and payout periods). Trying to salvage the best of a bad situation, the Estate of Kenneth Davis tried to include a value reduction in its computation since the estate was not allowed to sell or otherwise dispose of the future lottery payments to third parties. This reduction reduced the applicable taxes by about 50%.

In this recent case, the District Court in New Hampshire has sided with the estate, and it appears it will allow for the additional value reduction due to the restrictions on transfer. However, we will probably be hearing more about this issue, since there is a split among the Circuit Courts of Appeal whether such a reduction is appropriate.

This issue has implications beyond mere lottery winnings. It has potential application to other interests that are valued under actuarial tables for estate tax purposes when those interests are nontransferable under contractual provisions or even spendthrift clauses.

Davis v. U.S., 97 AFTR 2d 2006-332 (2005).

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