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What is a Private Annuity? A Private Annuity is a transaction, usually between related persons, in which the
Transferor (e.g. parent) transfers property (often substantially appreciated) to a trust or related person (e.g.
child) in exchange for a promise by the Transferee to pay a fixed amount of money to the Transferor for life.
Why would the transferor parent want to engage in a transaction like this? Usually, a Private Annuity is an
estate planning strategy for the Transferor to defer any gain on the sale of the property, spreading it out over
his lifetime. Sometimes the family anticipates that the property would be sold by the Transferee who will
recognize no gain on the sale, because the transaction is generally structured so that the value of the annuity,
using the IRS Tables on life expectancy and current interest rates, is equal to the fair market value of the
property transferred.
Another reason for a Private Annuity would be turn a non-producing asset into a stream of cash. For example,
a widow might sell farm land to a child in return for a private annuity.
A third reason might be that stock of a closely held corporation may be sold by one shareholder, either back to
the company or another shareholder.
Sometimes a client wants to limit the size of his or her estate and wishes to transfer future appreciation
potential to family members.
Can the Transferee Be Trusted? Typically, a Private Annuity involves a considerable amount of trust by the
Transferor/Parent, since she is relying on the management of the property and the ability of the Transferee to
make the annuity payments. Obviously, if the Transferee squanders the asset, or the money received on a
sale, the annuity payments might be defaulted. In order for this technique to work, from a tax standpoint, the
annuity is unsecured. The Transferor has to rely on the financial resources of the Transferee, to honor the
obligation.
Can a Trust be the Transferee? The answer to this question is a typical lawyer’s response, "it depends." A
carefully drafted Trust can be used as the Transferee. In that case the Trust either has other assets, or plans
to sell the property soon after the annuity transaction is made so that there will be liquid assets to make the
annuity payments. In some cases, the Trust could purchase a commercial annuity with the proceeds. In either
case, the Trust assets would be proceeds of the sale and will generate sufficient cash to make the annuity
payments and/or may be invested in a higher rate of return than the annuity calculations.
If a Trust is used as a Transferee, we generally advise that additional assets be transferred to the Trust in the
form of a gift, usually 10% of the fair market value of the annuity property. This is a precaution to make sure
that the desired tax results are achieved. Drafting precautions need to be followed where a Trust is used, and
the Transferor should not be the Trustee.
What If the Transferor Dies Prematurely? Since the annuity payments terminate at death, there is no taxable
asset in the Transferor’s estate. From the standpoint of the Transferee, individual or trust, there will be tax
consequences. There may be taxable gain to the Transferee if the Transferee has already sold the property.
Conclusion. A Private Annuity is a complicated transaction that may fit the needs of a particular family. Deferral
of taxable gain, conversion of non-productive property to a regular cash flow, and transfer of appreciation to
the next generation are the normal objectives.
If you have plans where deferral of gain is desirable and property can be transferred either between
generations or to a Trust for succeeding generations, a Private Annuity may fit the bill. It should not be done
without professional consultation and we would hope you would contact Jim Modrall or any of the attorneys
listed below at 231 941-9660.
Donald A. Brandt, Joseph C. Fisher, Thomas R. Alward, Edgar Roy, III, Matthew D. Vermetten, Thomas A.
Pezzetti, Jr., John. M. Grogan, Vicki P. Kundinger, Susan Jill Rice, Gary D. Popovits, Lawrence K. Kustra, H.
Douglas Shepherd, Jonathan J. Siebers and Karin Church at (231) 941-9660
©BRANDT, FISHER, ALWARD & ROY, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional
advice.
Transferor (e.g. parent) transfers property (often substantially appreciated) to a trust or related person (e.g.
child) in exchange for a promise by the Transferee to pay a fixed amount of money to the Transferor for life.
Why would the transferor parent want to engage in a transaction like this? Usually, a Private Annuity is an
estate planning strategy for the Transferor to defer any gain on the sale of the property, spreading it out over
his lifetime. Sometimes the family anticipates that the property would be sold by the Transferee who will
recognize no gain on the sale, because the transaction is generally structured so that the value of the annuity,
using the IRS Tables on life expectancy and current interest rates, is equal to the fair market value of the
property transferred.
Another reason for a Private Annuity would be turn a non-producing asset into a stream of cash. For example,
a widow might sell farm land to a child in return for a private annuity.
A third reason might be that stock of a closely held corporation may be sold by one shareholder, either back to
the company or another shareholder.
Sometimes a client wants to limit the size of his or her estate and wishes to transfer future appreciation
potential to family members.
Can the Transferee Be Trusted? Typically, a Private Annuity involves a considerable amount of trust by the
Transferor/Parent, since she is relying on the management of the property and the ability of the Transferee to
make the annuity payments. Obviously, if the Transferee squanders the asset, or the money received on a
sale, the annuity payments might be defaulted. In order for this technique to work, from a tax standpoint, the
annuity is unsecured. The Transferor has to rely on the financial resources of the Transferee, to honor the
obligation.
Can a Trust be the Transferee? The answer to this question is a typical lawyer’s response, "it depends." A
carefully drafted Trust can be used as the Transferee. In that case the Trust either has other assets, or plans
to sell the property soon after the annuity transaction is made so that there will be liquid assets to make the
annuity payments. In some cases, the Trust could purchase a commercial annuity with the proceeds. In either
case, the Trust assets would be proceeds of the sale and will generate sufficient cash to make the annuity
payments and/or may be invested in a higher rate of return than the annuity calculations.
If a Trust is used as a Transferee, we generally advise that additional assets be transferred to the Trust in the
form of a gift, usually 10% of the fair market value of the annuity property. This is a precaution to make sure
that the desired tax results are achieved. Drafting precautions need to be followed where a Trust is used, and
the Transferor should not be the Trustee.
What If the Transferor Dies Prematurely? Since the annuity payments terminate at death, there is no taxable
asset in the Transferor’s estate. From the standpoint of the Transferee, individual or trust, there will be tax
consequences. There may be taxable gain to the Transferee if the Transferee has already sold the property.
Conclusion. A Private Annuity is a complicated transaction that may fit the needs of a particular family. Deferral
of taxable gain, conversion of non-productive property to a regular cash flow, and transfer of appreciation to
the next generation are the normal objectives.
If you have plans where deferral of gain is desirable and property can be transferred either between
generations or to a Trust for succeeding generations, a Private Annuity may fit the bill. It should not be done
without professional consultation and we would hope you would contact Jim Modrall or any of the attorneys
listed below at 231 941-9660.
Donald A. Brandt, Joseph C. Fisher, Thomas R. Alward, Edgar Roy, III, Matthew D. Vermetten, Thomas A.
Pezzetti, Jr., John. M. Grogan, Vicki P. Kundinger, Susan Jill Rice, Gary D. Popovits, Lawrence K. Kustra, H.
Douglas Shepherd, Jonathan J. Siebers and Karin Church at (231) 941-9660
©BRANDT, FISHER, ALWARD & ROY, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional
advice.
| WEALTH CONSERVATION: PROFESSIONAL ALERT Brandt, Fisher, Alward & Roy, P.C. |
| If you would like to receive future editions of the monthly Wealth Conservation Newsletter directly to your e-mail account, please e-mail our office using the following link: Estate Planning Newsletter |
| Brandt, Fisher, Alward & Roy, P.C. Attorneys at Law |
| May 2006 PRIVATE ANNUITIES - HAVING YOUR CAKE AND EATING IT by James R. Modrall III, J.D., C.P.A. |