Owners of appreciated property can use private annuity trusts to accomplish the following:
1) Defer capital gains taxes on the sale of a property.
2) Defer the tax on recapture of depreciation.
3) Create a lifetime stream of income for an individual or jointly for both spouses.
4) Defer receipt of the annuity payments (and taxes) until retirement.
5) Create a family investment trust with the remainder going to the owner’s family or heirs.
6) Provide a financing vehicle for family members.
7) Remove an asset from the owner’s taxable estate.
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). 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.
The IRS allows you to defer receipt of payments any time until you’re 70½; deferring payments also means deferring tax liability. In most cases, private annuities are between parents and children, but that’s not required.
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.
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. A private annuity trust is an irrevocable non grantor trust, which means that once it’s set up it’s difficult and expensive to change.
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. 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.
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. An attorney will charge around $3000 to execute an annuity contract.
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. An accountant that specializes in trusts will have to be hired to handle your annual tax returns.
Please note that this Scottsdale Real Estate Blog is for informational purposes and not intended to take the place of a licensed Scottsdale Real Estate Agent. The Szabo Group offers first class real estate services to clients in the Scottsdale Greater Phoenix Metropolitan Area in the buying and selling of the best Luxury homes in Arizona. Award winning Realtors and Re/MAX top producers and best real estate agent for Luxury Homes in Scottsdale, The Szabo group delivers experience, knowledge, dedication and proven results. Contact Joe Szabo at 480.688.2020, [email protected] or visit www.scottsdalerealestateteam.com to find out more about Scottsdale Homes forSale and Estates forSale inScottsdale and to search the Scottsdale MLS for Scottsdale Home Listings.