Thursday, October 19, 2006

Breaking News Regarding the Private Annuity Trust

On October 18, 2006 the US Treasury Department issued a new proposed regulation regarding private annuity trusts.

It is reg 141901-05. It has not been published yet, but will be very soon.

For the time being, Private Annuity Trusts have been discontinued for use. We believe it is due to the number of PATs which were improperly structured, funded, and administered.
In many cases, close relatives were made trustees and this brought into question the "hands off" intention of a non-grantor trust.

The investments and borrowing practices in some of these trusts were also improperly and imprudently handled.

In many cases the trusts were not properly set up, filed, and the tax returns required were either not filed as necessary or were filed in error. This was mostly due to non-professionals handling the details and not knowing what was required.

For years, the trust company I represent has requested the IRS establish clear guidelines to prevent this type of abuse. It now seems this may be in the process of happening, but unfortunately, instead of publishing guidelines first, the IRS decided to discontinue the PAT until further notice. There will be a hearing on the proposed regulation on February 16, 2007.
As you can imagine, there are many attorneys working on alternate solutions to this sudden ruling.

The Capital Gains Tax Problem still exists for thousands of people and businesses. This need will only continue to increase and there are still solutions and strategies available to implement.
The current momentum is that we are working on variations of the Charitable Remainder Trust. It has always been one of the options and now it is more important than ever for capital gains tax savings.

The 1031 Exchange and 1031/TIC Exchange are also powerful concepts that continue to grow exponentially in monies invested.

It is my personal opinion that the PAT will be back. I can't say when, or what guidelines it will have once it is re-instated, but there are over 70 years of tax laws supporting its use and value.
It seems, once again, that some people and professionals pushed the envelope too far and took advantage of the intent of the Private Annuity Trust. Let's hope if and when it does come back, it will have the same great advantages, but will also prevent blatant abuse by less than "trust worthy" parties.

I will be updating you as information becomes available.

Warmly,

Paula Straub

ps. If you have questions you would like to see addressed, please email them to me at askpaula@savegainstax.com

Wednesday, October 18, 2006

There is a reason for IRS time lines in 1031 Exchanges

For a 1031 Exchange, be it a straight 1031 or a 1031 Tenant in Common Exchange, IRS dates need to be observed.

Not only for strict tax purposes, but for practical reasons as well.

Once paperwork is filed with a Qualified Intermediary prior to close of escrow that a 1031 exchange will be made, one has 45 days from the date of close to identify property(s) that one intends to purchase.

If there was some way to "fudge" this deadline (please don't ask me how because it is definitely nothing I advocate and would definitely advise strongly against) here is what could happen.

Besides having your exchange disqualified (if the IRS found out somehow you didn't follow their rules) you run the additional risk of having your 180 day close of exchange sale deadline missed.

If you do not complete your exchange within 180 calendar days from date of property close, you will pay capital gains tax - no questions asked.

This seems like plenty of time, right? It usually is. Fluke twists of fate do happen. Financing falls through, mistakes are made through no fault of yours, and the consequences are ugly.

Moral: Stick to the rules. They are there for a reason. Bad things might happen if you think you can "beat the system"

Paula Straub
(760)917-0858

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