Private Annuity Trust

A private annuity trust is a capital gains deferral program that helps with both high capital gains and depreciation recapture costs. This plan is beneficial to the owner of a commercial or residential real estate property who doesn’t immediately need the money from its sale. With many people facing high taxes on highly appreciated property, a private annuity trust offers an option to save money.

In a private annuity trust, the owner “sells” the property to a trust by transferring ownership prior to the actual sale of the property. The trustee’s “payment” is in the form of the private annuity contract. This contract is set up to make a predetermined number of payments for a specific, pre-calculated amount for the remainder of the owner’s life. The annuity payment is calculated with a formula using the amount of the proceeds of the sale, the age of the owner, and the interest rate stipulated by the IRS.

The proceeds from the sale of the property are then held in the private annuity trust and can be invested by the trustee. Payments can only be made to the owner for the predetermined and agreed upon amount. Any income the private annuity trust makes must be held for trust beneficiaries.

The owner is only taxed on the payments from the annuity when they are received, instead of on the entire sum at the time of the sale. The payments do not have to begin immediately, making the private annuity trust a smart choice for retirement. As long as the payments begin by age 70, the owner can enjoy the tax benefits.

The private annuity trust program makes it easy for owners to take advantage of its benefits. The sale property may be any commercial or residential property — even a primary residence or a rental property. One stipulation is that the seller and trustee cannot be the same person. The designated trustee can be any relative, including an adult child — as long as he or she is not a dependent.

Private Annuity Trust Benefits

The private annuity trust is a very simple and strategic tax planning tool that can save hundreds of thousands of dollars in tax liabilities over time, while maximizing the value of your investment due to tax-deference and compounding of principal and gains. Some of the more popular trust benefits include:

  • Defer capital gains taxes normally due at time of sale
  • Pay no depreciation recapture taxes upon time of sale
  • Eliminate estate taxes due upon taxpayers death
  • Create a lifetime income stream for joint lives
  • Eliminate property management requirements
  • Maximize Medicaid planning benefits for asset protection
  • Provide asset protection against legal disputes
  • Avoid the expenses and delays of probate

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