Warning: As of October 18, 2006 Private Annuity Trusts (PAT) are no
longer recognized by the Internal Revenue Service (IRS) as legal means
for managing assets tax deferred! The Private Annuity Trust has been
replaced with The Ensured Installment Sale (Structured Sale), which
will be discussed later. The following information applies only to
Annuity agreements funded prior to October 18, 2006, which are still
honored by the IRS.
PRIVATE ANNUITY TRUST: WHAT IS IT?
A Private Annuity Trust works very similar to an Immediate Annuity,
although you will use assets other than money to fund this Annuity.
Typically, you transfer ownership of a home or land with high value to
a Trust. The Trust agrees to make lifetime payments to you, and can
then sell the asset you gave them and use the money to fund this
Annuity agreement through investments.
You cannot use other retirement funds such as a 401k to fund a Private
Annuity Trust, but you can add multiple properties to increase your tax
break and Annuity payment. If you decide to add an additional property
to your Private Annuity Trust you must create a new Annuity agreement
for each property, unless your original agreement contained a provision
to include additional assets at a later date.
Each new agreement will have a different deferral period which creates
an added benefit to you by providing both immediate and long term
income. The withdrawal period from a Private Annuity Trust must begin
by age 70 ½, but you can always choose to receive payments sooner.
When structuring a Private Annuity Trust, you must name a Trustee who
will be responsible for controlling the investments of your assets in
the Private Annuity Trust. The Trustee can be an adult child, relative,
close friend, attorney, or anyone else other than you or your spouse.
By law, the annuitant is not allowed to have any direct control over
the investments of their Annuity. You may make council to the Trustee
but cannot have any direct contact with the assets once they are
transferred into the Private Annuity Trust, and your transfer of
ownership is irrevocable.
ASSETS TRANSFERRED TO A PRIVATE ANNUITY TRUST: HOW TO ESTIMATE THE ANNUITY PAYMENTS
It is fairly easy to estimate what your Annuity payments will be for
the asset transferred into a Private Annuity Trust. The IRS uses the
following factors to determine your payment:
1. Your life expectancy
2. The selling price of your asset
3. The Annual Federal Mid-Term Rate (AFMR) effective when your property
was transferred (this rate will be the rate used for the duration of
your Annuity)
4. The length of time you defer payments
Using these factors, the amount you will receive from an Annuity is a
fixed amount and you cannot start and stop payments from a Private
Annuity Trust. Once the withdrawal period begins you will continue to
receive payments for life.
The “life expectancy" factor is only used by the IRS to help determine
what your payments should be and is not to be confused with a payment
“cutoff" age. If you live beyond what the IRS factored as your life
expectancy, you will continue to receive payments for life.
JOINT ANNUITY FOR SPOUSE TO RECEIVE PAYMENTS
Owning a joint annuity will allow your spouse to continue receiving
Annuity payments should you die first. After your spouse dies, payments
will cease and your beneficiaries will inherit any surplus money
remaining in your Private Annuity Trust created by wise investment
options of the Trust’s reserve.
By law there must be enough money set aside for the Trust to fulfill
its Annuity agreement with you, and there will usually be a reserve
account established of five to ten percent of your asset’s value as a
safety precaution. Remember, your Annuity payment is fixed and will not
increase regardless of profit your assets create via the Private
Annuity Trust.
NO ESTATE TAX, INCOME TAX OR GIFT TAX ON PRIVATE ANNUITY TRUST TRANSFER
When you establish a Private Annuity Trust, you are not subject to
estate, income, or gift taxes. The transfer of ownership of an asset to
a Trust is “paid for" by the Annuity agreement. The IRS cannot
accurately determine your life expectancy, and therefore cannot
determine how many payments you will actually receive.
Taxes will be deferred on the transfer until you start receiving
payments, and a portion of your payment will be taxed based on your
income amount. The transfer of ownership involving your assets is not
considered a gift to the Trust because they are agreeing to pay you for
the asset at a later date, and as a result you will not have to pay a
gift tax.
Once your asset is transferred to the Trust, it is removed from your
taxable estate. This is of particular benefit to your beneficiaries who
will not be held responsible for paying estate taxes when they receive
excess funds from your Annuity. After your death it is the
responsibility of the Trust to cover any unpaid taxes due on the
assets.
ENSURED INSTALLMENT SALE (STRUCTURED SALE)
The Ensured Installment Sale was developed by the Allstate Insurance
Company in 2005 and works in a similar manner to the Private Annuity
Trust. The major difference between the two is that when you sell your
assets, the Annuity is purchased directly from an insurance company.
The insurance company, and not the Trustee for a Private Annuity Trust,
is responsible for making investment decisions and ensuring you receive
Annuity payments for life.
Rocco and his team of bonded professional attorneys, CPAs and
accountants help affluent individuals and companies retain control of
their domestic and foreign/offshore assets, protect their assets, build
& preserve their wealth and financially structure their money to
reduce capital gains taxes, estate taxes, inheritance taxes, avoid the
probate process and decrease income taxes.
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Rocco Beatrice, CPA, MST, MBA, Award-winning trust & estate-planning expert
71 Commercial Street #150 Boston, MA 02109 tel: 508.429.0011 fax: 508.429.3034
Click here for more info: http://www.UltraTrust.com, http://ultratrust.com/charitable-gift-annuity.html
Disclaimer: All information on this site is provided for informational purposes only! By no means is any
information presented herein intended to substitute for the advice provided to you by any health care or other professional
or organization.
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