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What is a Private
Annuity?
Definition: Private Annuity – A method of selling
or transferring an asset whereby the seller (“transferor” or “annuitant”)
sells or transfers the asset to the buyer (transferee) in exchange for the
buyer/transferee agreeing to make certain payments to the seller/annuitant
until the seller dies.
To qualify as a private annuity for U.S. tax purposes, in addition to other
requirements, the buyer (obligor to make the annuity payments) must not
be in the business of issuing annuities.
The basic essence of a private annuity is that a person, called the
“transferor,” transfers property or money to a second person or trust
(domestic of foreign), called the “transferee,” in exchange for the
transferee’s unsecured promise to pay a lifetime income to the transferor.
If well-written, properly valued and calculated, and properly implemented, a
private annuity can save 100 percent of estate and inheritance taxes and 100
percent of gift taxes on the property transferred from the annuitant to the
transferee. Moreover, there can be income tax savings through: (1) removing
the transferred income-producing property from the ownership of a high-tax
bracket taxpayer to a taxpayer with a lower rate of tax; and (2) spreading
the payments of capital gains taxes over many years instead of just the year
of sale.
For a private annuity to be a sound move financially, the transferor should
have a reasonably limited life expectancy either because of age (e.g., over
55) or poor health.
None of the property transferred will be taxed to the estate of the
transferor (at the death of the annuitant) if the annuity payments end
completely at the death of the annuitant. If payments are for a fixed period
of time extending beyond the annuitant’s death, or if payments continue to a
second annuitant, the discounted (to the value at the date of death)
economic value of such future payments will be included in the
potentially-taxable estate of the annuitant.
To have annuity income go to more than one individual, it is normally better
to arrange separate private annuity agreements so that there will be no
residuary amount subject to estate tax at the death of each separate
annuitant.
A private annuity can be lawfully organized and located in the USA or any
other nation. |
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