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insured takes out a life insurance policy on her life to pay $1,000,000 at her death. she names her only child as the beneficiary on the policy. insured dies and the child agrees to forego the lump sum payment, accepting annual payments of $60,000 for life. the child has a life expectancy of 25 years. howmuchoftheannualpaymentcanthechildexcludein year one?

User Tomferon
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The child can exclude approximately $297,141.02 of the first year's payment from their taxable income.

Here's how to calculate the excludable portion of the first year's payment for the child:

1. Calculate the present value of the annuity:

Formula: PV = Annuity Payment / (Discount Rate * (1 - (1 + Discount Rate)^-Years))

Values:

Annuity Payment = $60,000

Discount Rate = Assume a 5% discount rate (adjustable based on relevant factors)

Years = Life Expectancy = 25 years

2. Calculate the present value of the lump sum payment:

Present Value of $1,000,000

3. Calculate the excludable portion:

Subtract the present value of the annuity from the present value of the lump sum payment.

Example Calculation:

Assuming a 5% discount rate:

Present Value of Annuity = $60,000 / (0.05 * (1 - (1 + 0.05)^-25)) ≈ $702,858.98

Present Value of Lump Sum = $1,000,000

Excludable Portion = $1,000,000 - $702,858.98 ≈ $297,141.02

Therefore, the child can exclude approximately $297,141.02 of the first year's payment from their taxable income.

User Travis Nelson
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