Tuesday, January 31, 2006

Private Annuity Trusts for Stock Sales

It's curious when certain types of potential clients have similar situations at similar times. This must be the time for stock buy-backs.

Sometimes when someone works for a startup company, they receive stock options or even shares of company stock at very low or no cost. This is an incentive to hang in there with the new company until it becomes successful and goes public. It often takes the place of a large salary or benefit package.

Some companies fail and others explode. Who wouldn't have wanted to be there at the beginning of Google, Microsoft or Walmart?

There may come a time when the company is bought out, or a time when the company has an option to buy back your shares at a certain price. Whatever the reason, this leaves you with a "good" problem. You get a windfall in a lump sum.

You have no or little basis and now the purchase price may be significant. Let's just say your purchase price was 1K and the company is buying them back for 250K. You have a capital gains tax obligation on 249K. This may be between 15%-30%. That's a lot of dollars to part with. At 23%, that's $57,270.00. If this is part of your retirement package, you might want to look into a tax saving strategy.

A private annuity trust may be a good option. The trust is created, the shares are transferred to the trust and the trust will receive the cash. That 250K is now working for you and the 57+K can be deferred or spread out over the rest of your life and paid in small chunks. You receive a lifetime income that you can depend on- similar to a pension plan or social security.

If you're lucky enough to have this "problem", make sure you check out all of your options. Keep as much of those gains as possible working for you.

Paula Straub

askpaula@savegainstax.com