Tuesday, September 20, 2005

Private Annuity Trusts

In most cases, a 1031 exchange into a tenant in common property benefits an investment property owner in many ways.
1. Provides an income stream
2. Defers all capital gains taxes
3. Relieves the seller of property management headaches
4. Gives benefits of real estate ownership (appreciation)
5. Passes asset to heirs capital gains tax free
6. Retain control of asset

However, there is another vehicle that can be just as powerful under the right circumstances. This is a Private Annuity Trust.

If the owner has a very highly appreciated property, is close to or in retirement, and needs a higher income, or just needs to separate some property from his/her estate, this may be the key.

A PAT (Private Annuity Trust) can be established, the property transferred to the trust, the trust sells the property, and the cash from sale is now put into an "annuity" and the seller becomes the annuitant. The annuitant will get payments from the trust over his life time and perhaps the lifetime of his spouse. He will pay capital gains tax spread out over a number of years, but gets to benefit from the compounded growth of all of his asset over time. He may defer receiving payments until age 70 1/2 if he so desires. Any assets remaining at death do pass to his beneficiaries after all the remainder of taxes due are paid by the trust.

Appreciated stocks can also be placed in a PAT and the capital gains spread out over years. Additional assets can be placed in the trust at later times.

I will be blogging more on specific cases where either the 1031/TIC or PAT benefits a client the most. Both are very powerful and superior retirement planning concepts.

Paula Straub

askpaula@savegainstax.com