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A private annuity trust simply describes a situation in which
one person (the annuitant) gives another person (or entity)
a sum of money or other assets in exchange for a promise to
provide a stream of payments in the future (an annuity contract).
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It’s a vehicle by which a property owner can sell appreciated
real estate, create a stream of income for life, and defer the
capital gains taxes. When appreciated real estate is exchanged
for a private annuity contract, no capital gains taxes or recapture
of depreciation are triggered. Instead, they’re deferred
until the future payments are received by the annuitant.
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The IRS allows you to defer receipt of payments any time until
you’re 70½; deferring payments also means deferring
tax liabsility.
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In most cases, private annuities are between parents and children,
but that’s not required.
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Unlike 1031 exchanges, private annuity trusts have not caught
on very well with the real estate community as an option for
tax deferral. This is probably because it’s a complicated
legal maneuver, which generally necessitates bringing in more
advisors.
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In addition to its capital gains tax advantages, private annuity
trusts can also help reduce estate tax liability. All you have
to do is transfer an asset from your estate to a private annuity
trust so it won’t be counted upon your death.
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A private annuity trust is an irrevocable nongrantor trust,
which means that once it’s set up it’s difficult
and expensive to change.
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Annuity payments are for the lifetime of the annuitant; once
the annuitant dies, the trustee is responsible for distributing
any remaining trust assets to the predetermined beneficiaries.
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Because tax liability can be deferred until you’re 70½,
a private annuity trust can work just like an IRA or any other
retirement investment vehicle. The advantage is that it offers
more flexibility in terms of choice of investment.
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One of the best ways to use a private annuity trust is to buy
commercial annuities or appreciable assets. Commercial annuities
don’t offer the growth potential of other types of investments,
but they do provide security and additional tax deferral.
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An attorney will charge around $3000 to execute an annuity
contract.
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A professional trustee will charge approximately 1 to 1½%
of the trust assets (under a million) to take care of the day-to-day
affairs of the trust. Over that amount, the fee may be negotiated.
A responsible, competent adult child, however, may also execute
these responsibilities.
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An accountant that specializes in trusts will have to be hired
to handle your annual tax returns.
Disclaimer: This article is provided for information
use only. It does not take the place of an attorney, a tax advisor,
or an accountant. Always seek out the advice of a licensed professional
before undertaking any significant change in your financial
situation.
We at Valerie Fitzgerald and Associates realize that you are in the information gathering stage of your purchase and we respect your privacy. Should you have any questions, please feel free to email us at info@valeriefitzgerald.com or call us directly at 310-285-7515. If you or anyone you know is looking to buy or sell a home, please note that we can provide detailed information and access to:
You can count on the services of Valerie Fitzgerald and Associates to provide you with information you can trust.
Defer
capital gains taxes on the sale of a property. 
