I thought it best to break down how the Insured Structured Sale has come into being into a 3 part article. I think it will give you a bit of insight on just how powerful a concept it actually is, and that it is a great alternative to the Private Annuity Trust, which is currently unavailable for use, as of 10/18/2006 until further notice.
In this article, I'll give the basics of an Installment sale which follows IRS guidelines, section 453. It is not my intent to go into IRS code specifics here or technical jargon, only to relay the concepts to make them understandable.
Part 2 will feature the basics of the Structured Sale, and Part 3 will show how both Parts 1 and 2 have emerged into the Insured Structured Sale.
In its basic structure, and I'll use real estate as an example, the Installment Sale is basically an agreement between the buyer and the seller for the buyer to make payments back to the seller over a stated period of time, with a specific interest rate until the agreed upon sales price has been fulfilled.
For example, the seller sells a property for 500K to a buyer. Instead of the buyer getting a mortgage or paying cash for the 500K, he/she agrees to make monthly payments over say 30 years to the seller at 6% interest rate. The seller is effectively the bank.
The seller only has to pay capital gains tax as he/she receives portions of the principle in payments, thus spreading out the tax obligation over a number of years. That is the upside.
The downside might be if the buyer quits making payments, or refinances the obligation. In this case the seller either has to take legal measures and possibly get the property back after time and expense, or receives a lump sum which causes all remaining capital gains tax to be due.
There are all sort of variations on this example, but hopefully you get the gist. This option is still available, but for a person setting up their retirement, it may be too risky.
Next, in Part 2, I will explain how the risk can be successfully transferred via a Structured Sale, but the reward my be less than ideal.
Paula Straub
askpaula@savegainstax.com
ps. I welcome your questions and comments. If you can't wait for Parts 2 and 3 give me a call and I will give you the details. 760-917-0858
