Deferring Real Estate Taxes Using A Private Annuity Trust
Individuals who own real estate, businesses or other appreciated assets are often required to pay a large capital gains tax, 15% Federal and 9.3% California state, when they sell their business, property or stock. The Private Annuity Trust is a way to not only defer that capital gains tax, but to also provide for significant estate planning benefits for the seller." said Tim Smith CLU, ChFC, RHU, REBC, RFC, LUTCF, a Financial and Estate Planner and President of Valliance Financial Advisors in Roseville, CA.
The Private Annuity does not eliminate the taxes, but rather defers them for long term, often for decades, and with no penalty or interest for doing so. The deferral takes place because the property owner receives his sale proceeds in a lifetime income stream from a private annuity contract. Capital gains and recapture taxes are paid as the income stream is received.
With the Private Annuity the property owner places the appreciated asset into a trust, rather than directly selling it to the buyer, the trust belongs to and is controlled by the seller's family. Its beneficiaries are the heirs or children of the property seller. The trust "purchases" the asset from the seller. Instead of cash purchase the trust pays the seller with an annuity contract. The annuity contract is a private arrangement issued by the trust itself and is not a commercial annuity from an insurance company. The annuity makes the seller an "annuitant" and that is how we will refer to the seller after this. The annuity contract is a promise to make payments to the annuitant for the balance of the annuitant's life. The payments can be made to either a single person or in a joint last-to-die arrangement to a married couple. Often the first payment on the annuity is deferred, maybe for many years down the road, such as when the annuitant has reached retirement age. But the annuitant has the option of beginning the annuity payments right away. Usually the annuitant has located a "real" buyer for the assets and has negotiated a fair market price for it. The sale is not completed until the asset has been sold twice; first from the annuitant to the trust, and paid for by an annuity, and second from the trust to the "real" buyer in cash.
"A Private Annuity Trust is a terrific exit strategy for business owners that want to sell their business, and especially property owners in California’s accelerated real estate environment.” Said Christian Ramsey, an investment advisor with Valliance, “Especially considering the fact that the assets in the trust are passed to your beneficiaries at a stepped up basis and the trust assets are protected from judgments, liens and bankruptcy claims.”
Under this strategy there are few exclusions regarding the type of investment that the trust can engage in (unlike the restrictions on a charitable remainder trust). For example, the trust can invest in financial products, securities, and real estate. Loans can also be made from the assets held in a Private Annuity Trust allowing for a great deal of flexibility in fitting with a seller’s needs.
“With prudent investments, it is possible for the assets held in a Private Annuity Trust to grow at a faster pace than required distributions.” Said Tim Smith “This would help leave a considerable legacy to a seller’s heirs while they enjoy a lifetime income stream; meaning it is possible to have your cake and eat it too.”
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