Advising Clients since 1980
Private Annuity Trusts
For those with highly appreciated residential or commercial real estate investments who are looking for a strategy to avoid, defer or reduce their capital gains tax consequences, the private annuity trust offers many unique benefits.
How Private Annuity Trusts Work
The general process is as follows:
The process begins with a property owner transferring ownership of the property to a dedicated family trust
The trust “pays” the property owner (annuitant) for the property
The payment isn’t in cash but with a special payment contract called a “private annuity”
This private annuity promises to make payments to the annuitant for the rest of his or her life
After the death of the annuitant, the trust then sells the property
There are no taxes to the trust upon sale since the trust “paid” for the property in the form of a private annuity
Reasons to Create a Private Annuity Trust
The seller of the property (annuitant) can choose deferral of annuity payments if they have other sources of income and/or don’t need payments to begin immediately.
The IRS tax code doesn’t require payment of the capital gains until the annuity payments begin
Capital gains tax is paid to the IRS with an “easy installment plan” since only that portion of capital gains is due in proportion to the number of years the annuitant is “actuarially” stated to live (a 65-year old will, on average, live 20 years meaning the capital gains tax is paid over 20 years at 1/20 per year)
There is no interest or penalty on deferring payments of capital gains taxes due
Capital gains taxes are paid with “depreciated” dollars since the value of the dollar declines over time due to inflation
The balance remaining in the private annuity trust can grow at a rate greater than inflation to retain purchasing power of the balance remaining
Other Important Information on Private Annuity Trusts
Payments received by the seller (annuitant) of the appreciated property are based upon: 1) the age of the annuitant; 2) the net selling price of the property (actual price less any mortgages, fees or commissions); and 3) the length of the deferral, if any, until payments begin
Payments continue until the annuitant(s) die regardless of whether it is sooner or later than the expected (actuarial) time
The proceeds remaining in the trust are extremely flexible and can purchase additional real estate or more traditional stocks, bonds or money market investments
The annuitant can borrow from the trust
Believes the children will need to spend their inheritance
Upon the death of the annuitant(s), the estate receives the remaining balance with no taxes due
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Charles M. Bloom, Registered Principal offers securities and advisory services through Centaurus Financial, Inc. - Member FINRA and SIPC - 775 Avenida Pequena, CA, 93111 (mailing address: 3905 State Street Suite 7173, Santa Barbara, CA, 93105) - CA Life Insurance License No. 0A52786 - Centaurus Financial, Inc. and Shoreline Wealth & Investment Management are not affiliated companies.
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