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Annuities
Private Annuity Trust: Sell Appreciated Assets while Deferring Income Taxes and Avoiding Estate Taxes
By J. Patrick Costello
Investment Advisor Representative, Equity Services, Inc.
In the right circumstances, few if any financial planning strategies can generate the combined benefits of the Private Annuity Trust. The concept is deceptively simple: Sell an appreciated asset (real estate, a closely held business, a stock portfolio) to a Private Trust in exchange for a stream of level payments that can begin as late as age 70 and could last for the rest of your life.
Tax deferral
Once the asset is sold by the trust, income taxes due on the appreciation are payable only as payments from the Trust are actually received. Thus someone liquidating a highly appreciated piece of income property at age 50 could delay receipt of the income stream for twenty years (age 70), and then only pay taxes each year on the taxable portion of each payment as the payment is received. It’s conceivable that the taxes due would not be fully paid for another fifteen years (the actual time period would be dictated by actuarially determined life expectancy calculations). Assets remaining in the trust at the death of the party receiving the payments (technically designated as the annuitant) inure to the benefit of the trust beneficiaries – typically the children or heirs of the annuitant.
Federal estate tax reduction
Significantly, this is far from the only benefit that may be conveyed by the Private Annuity Trust strategy. Since the transaction is considered a sale and not a gift, the Private Annuity Trust is an extremely potent Estate Tax mitigation technique. Families of means can dramatically reduce the size (and consequent Federal Estate Tax exposure) of their estates without concern about gifting limitations or timing, simply by having the parent(s) sell valuable assets to the Private Annuity Trust. The Trust can be structured to convey its remaining assets to the heirs of the family at the death of the parent(s). Any payments received from the Trust by the parent(s) would of course be included in the estate unless consumed before death.
Liquidate asset at optimum moment
The third significant potential benefit of the Private Annuity Trust is the ability to choose the appropriate time to liquidate an appreciated asset and reinvest the proceeds in other assets that may now be more suitable to the goals of the family. Particularly in the case of real estate or a business, the family may conclude that there is a particular time when the asset can be sold for maximum value, and wish to “pull the trigger” without the burden of immediately paying the income taxes due.
Word of caution: The legal structure of a Private Annuity Trust is complex, and it is prudent to make certain that the legal team with whom you work is experienced and knowledgeable in this very specialized arena.
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