Thursday, October 12, 2006

An Unexpected Surprise and Potential Capital Gains Tax Nightmare

You might think of bonds as a pretty safe long term investment. If you're not familiar with the different type of bonds out there, you may think of ordinary government saving bonds or Treasury bonds.

I spoke to a gentleman this week who had exchanged a real property for a type of tax free industrial bond several years ago. It was done as a structured sale with a non-profit organization, and the return rate was actually very good and supposed to last for 13 years. He was paying a bit of principle back each year, but most of his income was from the bonds and non-taxable.

Then came the nasty surprise. After only a few years, the bonds were being "called" by the non-profit organization. They had gotten a new bond issue for more than 3% less interest, and it was in the original agreement that they could replace or pay out at a date sooner than the original bond termination date.

Well, now this gentleman was no longer in such a great position. If he sold outright, he would pay 30.5% in taxes. If he allowed his bonds to be replaced, he would lose a good portion of his tax free income, and the new bond issue was backed with "shaky" projects. He could actually lose much more if not all of his substantial investment in the future.

In this case a Private Annuity Trust will suit him well. It will give he and his wife a substantial lifetime income. It will spread out his tax burden over the next approximately 26 years. He will be able to borrow back a portion of his investment through a loan agreement within the trust, and it will remove this property from his estate, so that his heirs will not be faced with a large estate tax burden when he and his wife pass away.

His attorney and CPA were not familiar with the PAT. This situation is all too common, and can place a party in a bad situation if the advisors they count on are not aware of effective capital gains tax saving strategies. In this case, I hope to educate all involved and turn this "unfortunate surprise" into a much more tenable situation for everyone.

Paula Straub
Educate Yourself on Tax Saving Strategies

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