Wednesday, November 15, 2006

Part 3 of 3 - Origin of the Insured Structured Sale

Part 1 covered the basics of an Installment Sale. Part 2 explained the concept of a Structured Sale. Part 3 will now go over how the combination of the first two concepts has become the Insured Structured Sale as it exists today.

Using the example of a 500K sale of real property, here’s how the Insured Structured Sale might work.

Assume this property is owned free and clear. A buyer is found and an agreeable sales price is determined (500k).

Prior to close of escrow, an Assignment Company meets with the buyer, and the buyer assigns the obligation for making payments totaling the sales price to the seller. The buyer pays his 500K to the Assignment Company and his sale is complete.

The Assignment Company now enters into a contract with the seller to make payments to the seller over a certain amount of years at an agreed upon interest rate.

Capital Gains Tax and recaptured depreciation is deferred, and paid back in small chunks as payments are received.

It is at this point the Insured Structured Sale is differentiated from the Structured Sale described in Part 2.

The Assignment Company now is obligated to make the agreed upon payments. They will in turn back their obligation with quality commercial annuities, but they are not obligated to purchase any particular product, nor does it have to be a Single Premium Immediate Annuity.

This is important, because with the range of annuities on the market today with principle guarantees and living benefits, as well as better liquidity, it gives the Assignment Company the ability to be much more flexible with the Sales Contract, making the terms much better for the seller.

Each case can be viewed individually and the best product for each unique situation can be utilized. Age, length of term, income needs, liquidity needs and growth factors can all be taken into consideration.

Since the annuity will not actually be annuitized, any remaining assets will pass to the heirs upon death.

The seller is not locked into a low interest, non-flexible product for the duration of the contract term. He is assured that all monies will be returned to him and/or his heirs with interest over time. There can even be provisions made within the contract to revisit the terms at benchmark dates and possibly revise the contract for purposes like inflation rates, etc. depending on the asset performance.

The fees involved are on a flat fee basis, no matter what the amount of the original sales price.

These are just the basics of this new strategy, and more examples will follow as cases unfold.

It is also important to note, that to the best of my knowledge only one Assignment Company offering this option exists at this time. Over time, you may see others follow.

The Insured Structured Sale really is a good alternative to the Private Annuity Trust, and in some cases, if the PAT is made available again in the future, I believe the Insured Structured Sale may still be the choice of many with Capital Gains Tax concerns.

I’ll keep you posted.

Paula Straub
760-917-0858
askpaula@savegainstax.com

ps. Find out if an Insured Structured Sale can benefit you. Fill out the Qualification Questionnaire and get a confidential and timely personal response.