Private Annuity Trust or Charitable Remainder Trust?

I have found there are more people (even professionals) who know more about Charitable Remainder Trusts than Private Annuity Trusts.

So why one vs. another?

It really depends on your need for your money or income. Both defer or eliminate capital gains tax. But do you want the use of all your money during your lifetime, or will just the interest that the money makes suffice? Do you want to leave a legacy to your heirs or your favorite Charity?

The best time to create either option is when you have a highly appreciated asset such as real estate. If you sell outright, you will lose a great portion of your appreciation to capital gains tax. Maybe up to one third.

A Charitable Remainder Trust will provide the following:
1. You will pass your asset capital gains free to your favorite charity.
2. You can get whatever gains the trust makes during your lifetime as payments.
3. If you are healthy, the trust can purchase a life insurance policy on you which will pay your beneficiary a tax free benefit to replace the money going to charity instead of your heirs.
4. A good choice if you want to separate assets from your estate and you don't need the money from the asset.

A Private Annuity Trust will provide the following:
1. You will defer capital gains tax over the rest of your life and pay in smaller installments once you begin receiving payments.
2. You can defer taking income until age 70 1/2. This will allow your gains to work for you over time while continuing the deferral of taxes.
3. It will provide you with a larger income during retirement.
4. Your beneficiaries will receive any funds remaining in your trust free of estate tax, transfer tax, gift tax, and generation skipping tax.
5. You can still list a charity as beneficiary if you wish.

Both are powerful concepts. Which one is best depends on your own personal needs.

If you would like help deciding which is a better fit, give me a call or send me an email.

Paula Straub
http://www.savegainstax.com

askpaula@savegainstax.com
(760)917-0858

Private Annuity Trusts

In most cases, a 1031 exchange into a tenant in common property benefits an investment property owner in many ways.
1. Provides an income stream
2. Defers all capital gains taxes
3. Relieves the seller of property management headaches
4. Gives benefits of real estate ownership (appreciation)
5. Passes asset to heirs capital gains tax free
6. Retain control of asset

However, there is another vehicle that can be just as powerful under the right circumstances. This is a Private Annuity Trust.

If the owner has a very highly appreciated property, is close to or in retirement, and needs a higher income, or just needs to separate some property from his/her estate, this may be the key.

A PAT (Private Annuity Trust) can be established, the property transferred to the trust, the trust sells the property, and the cash from sale is now put into an "annuity" and the seller becomes the annuitant. The annuitant will get payments from the trust over his life time and perhaps the lifetime of his spouse. He will pay capital gains tax spread out over a number of years, but gets to benefit from the compounded growth of all of his asset over time. He may defer receiving payments until age 70 1/2 if he so desires. Any assets remaining at death do pass to his beneficiaries after all the remainder of taxes due are paid by the trust.

Appreciated stocks can also be placed in a PAT and the capital gains spread out over years. Additional assets can be placed in the trust at later times.

I will be blogging more on specific cases where either the 1031/TIC or PAT benefits a client the most. Both are very powerful and superior retirement planning concepts.

Paula Straub

askpaula@savegainstax.com

Need More Income from your Investment Property?

The goal of every real estate investor is to see their property appreciate in value and to have it generate a positive cash flow. The appreciation normally takes care of itself if the property is of good quality, in a good location, and is held over a long enough period of time. Just like the stock market, real estate has proven to go up way more than it goes down over time.

The positive cash flow component is not always a given though. Ask any seasoned investor, and unless the property is owned free and clear, there have probably been times when he's had to dip into his own pocket to pay for some aspect of his rental. Who hasn't seen a raise in homeowner's fees, property taxes, an outlay of cash for a new roof, plumbing, paint, carpet, appliances, or a length of time supporting it between tenants.

So, what if you're nearing retirement age and see the need for increased and steady income? You may even look forward to taking a permanent break from the "joys" of hands-on property management. We all deserve to reap the rewards of our labors, right?

Basically, to meet these goals, one can do one of two things.

1. Sell the property, pay all the capital gains taxes, recaptured depreciation, etc. and pocket what is left. To receive an income, one would have to either live off whatever interest/gains your proceeds produced, or begin depleting your funds to provide you with the amount of monthly income you deem necessary. Depending on your age and financial needs and whether or not you desire to leave as large a legacy as possible, this approach may or may not work for you.

2. Employ a strategy that will defer the payment of any tax or depreciation. Let all of your gains continue to work for you throughout the course of your retirement and into the next generation. Yet, you will still get a significant and partially tax deductible monthly income.

What strategy is #2? If your property is over a million and you are not a young retiree, you might consider a Private Annuity Trust. You will get monthly income for the rest of your life, but you will be depleting your asset and only spreading out the repayment of capital gains tax over a longer period of time. That is a simplification of a complex agreement, but that is the gist.
A better option may be a 1031 exchange into a tenant in common (TIC), Basically, you exchange your property for a deeded partial interest in a grade A commercial property. You sign a contract with a property management company, and in turn receive a monthly income (typically 6-7% of your total equity). You never have to deplete your asset, and it can pass to your heirs at the stepped up basis.

The 1031/TIC exchange is a fairly new concept, sanctioned by the IRS in 2002. It is projected that the influx of property assets into this type of exchange will be close to 5 Billion dollars in 2005. That's a lot of equity. Why not let your equity continue to work for you instead of parting with a lot of profits that would take you years to replace.



Sign up now to learn the secrets of deferring capital gains tax indefinitely. Visit the link http://www.savegainstax.com

You can't usually have everything, right?

As I meet with clients on a daily basis, it's clear that just about everyone wants to get the highest return on investments, have no risk, pay as little as possible for insurance premiums-but have maximum coverage, retire early and live in the home of their dreams.

When I ask what they will give up to obtain these things, they would prefer not to give up anything. If only life worked that way!

It's clear that in today's world we are more of a society that feels entitled. Work ethic, personal sacrifice, and plain old hard labor are harder to find than in years past.

Don't get me wrong, a lot of people work and work and never seem to get ahead. It's the ones with good jobs, lots of toys and no savings that are in for a rude awaking as they approach their retirement years.

With all the recent tradgedies in the gulf coast, we would all do well to think about the important things. Family, friends, personal abilities. We each may be faced with starting from scratch and rebuilding our lives from the ground up, with or without our loved ones.

I still believe what you put out is what is returned to you in due time. So, next time you think you are "entitled" to something, ask yourself why. You may be surprised when you can't come up with a good answer.

Paula Straub
http://www.savegainstax.com
askpaula@savegainstax.com

5 Options when selling Investment Property

So you want to sell your rental property. Do you know what your options are? You do have several. The crux is, how much of your gains do you actually want to keep?

Option 1: Sell your property and pay Capital Gains Tax, Recaptured Depreciation, and if in California, another 3.3% franchise fee to be held for a year.
Result: Lose the most money overall

Option 2: Sell your property and do a 1031 exchange into a equal or greater value property. Defer Capital Gains and recaptured depreciation.
Result: Usually higher property taxes, a new mortgage and the same property management problems.

Option 3: Set up a Charitable Remainder Trust. Put your property in the trust and have the trust sell the property. Pay no capital gains tax.
Result: Lose control of your asset. Receive income from the gains on the principle during your lifetime. On your death, the principle goes to the charity of your choice. Great if you have no heirs and don't need more income than the interest on the principle provides.

Option 4: Set up a Private Annuity Trust. Put your property in the trust and have the trust sell the asset. Spread out the capital gains over a period where you take equal payments for your lifetime.
Result: Lose control of your asset. Trustee will invest. You can defer taking income and let principle grow for a period of time. Your heirs can receive the remainder of the asset on your death.

Option 5: Do a 1031 exchange into a tenant in common property. Defer all capital gains tax and recaptured depreciation.
Result: Receive contractual monthly income. Have no property management headaches. Receive all appreciation on your share of grade A commercial building. Exchange in the future for another property. On your death, the asset passes to your heirs at stepped up basis under current tax law. No capital gains due. No recaptured depreciation. No depletion of asset.

Obviously, these options have been simplified for this article, but you get the gist.

Which option would be your choice?
Sign up right now for a free teleconference and learn more about which is most beneficial for you.
Visit http://www.savegainstax.com and register for the next call.
Or
email Paula at askpaula@savegainstax.com and ask any questions you may have.

Will a 1031 Property Exchange Solve your Problems?

If your problem is listed below, a 1031 exchange may or may not be your solution.
1. Are you a landlord that doesn't want to manage property anymore?
2. Do you want to sell your investment property, but don't want to pay huge amounts of Capital Gains Tax?
3. Is your current income property not producing enough income?
4. Do you have a low adjusted basis and not much debt on your rental?
5. Is your credit rating less than perfect?
If you answered yes to any of the above 5 questions, a traditional 1031 property exchange into another like-kind property might just put you right back to square one!
Let's address each of the 5 problems one at a time.
1. If you exchange your current property for another of equal or greater value you still are faced with the same landlord/tenant problems that you currently have. Sure, you could hire a property manager, but why is it that you currently don't have one?
2. A 1031 property exchange into a like-kind property does defer the payment of Capital Gains tax if you carry over all your equity and at least the same amount of debt. However, since your new property costs you at least as much as you sold the last for, your property taxes will most likely increase. The cost of your new investment has probably just gone up.
3. If your positive cash flow is currently nothing to write home about, your new property will have to justify higher rents, be located in an area with lower property tax, or have fewer maintenance costs. Otherwise, the chances of additional passive income are very slim.
4. Your adjusted basis will carry over as is to the new property, so you will receive the same depreciation benefits as on the prior property, unless you pay more for your exchanged property. Most likely a wash here.
5. A poor credit score may result in a higher interest rate or poorer terms on your new mortgage, assuming you don't own your current property free and clear. Again, this translates into higher ownership costs. You will also pay two sets of closing costs in the transaction.
One more thing to consider is the time it may take to sell your current property, find a replacement property and secure all funding. This must be done within the 1031 specific time frames. Think of the times that escrows have fallen through and loans have dragged on forever and sometimes never closed at all.
Considering your dilemma and possible pros and cons, will a 1031 property exchange put you farther ahead, further behind, or at best put you right back in the same boat you are in now?
If the answer to the last question was not "further ahead", let me suggest that you look into a 1031 exchange that has a slightly different twist.
It's called a 1031 exchange into a tenant in common property. This might just put you in the "farther ahead" category and solve many of your problems. Instead of exchanging into another solely owned investment property, you will get a fractional proportionate share of an A grade commercial property. You will have a deeded interest equal to your share of ownership (your exchange amount).
If done properly:
1. You will no longer be responsible for the property management
2. All capital gains will be deferred.
3. You can get a contractual monthly income from the equity transferred (usually 6-7%)
4. Your carryover basis is the same, but you can acquire extra non-recourse debt without qualifying and receive a higher interest deduction on your monthly income, thus making it less taxable.
5. The debt you acquire with the TIC (assuming your debt/equity ratio is within the accepted guidelines does not require you to obtain a mortgage or pay it down. This is called non-recourse debt. Your credit score does not become a factor, and the closing can be done in a matter of days, not weeks or months.
Now, ask your self again. Would a 1031 exchange into a tenant in common solve your problems? If the answer is "yes", what are you waiting for?

3 Mistakes to Absolutely Avoid when doing a 1031 Exchange into to TIC

Have you ever wondered how an absolutely terrific concept can go so horribly wrong?
Don't you just hate to hear "I told you so" from your well-meaning friends and family?
Ever catch yourself saying "If only I'd have..."?
I'm one of those people who like to learn from someone else's mistakes. It saves me all kind of heartache and pain. If you're at all like me and have thought about doing a 1031 like-kind property exchange into a tenant in common (TIC) property, my bet is you'll be glad you did. If you can just avoid the 3 pitfalls that can make you wish you hadn't!
Before I let you in on the secrets, let me briefly explain exactly what a 1031 exchange into a tenant in common property is. It's a pretty well-kept secret in and of itself.
Those who benefit most greatly from this type of an exchange usually have several things in common.
1. They own investment property that has appreciated significantly in value.
2. They are tired of all the hassles of property management.
3. They don't want to pay huge amounts of capital gains tax if they sell.
4. They appreciate a significant increase in monthly passive income.
5. And, lastly, they still enjoy the relative stability of owning real estate.
Know of anyone who fits this description? If so, read on.
A 1031 exchange is when an investment property owner sells his current property and exchanges it for a "like-kind" property of equal or greater value. By doing so, he defers the payment of capital gains tax and the consequences of recaptured depreciation.
By exchanging into a tenant in common property, or a TIC, he becomes a part owner of a large commercial property managed by professionals who in turn pay him a monthly income. For those individuals described above, it can be a very valuable transaction. It often comes with fewer strings than private annuity or charitable remainder trusts, or an exchange into another property that needs their attention and drains their cash. I find that very few individuals, CPA's, attorneys, or even financial planners are well versed or knowledgeable in this area.
So what must you avoid at all costs when contemplating this exchange? The following three potentially disastrous scenarios.
First, do not deal with an investment company that does not have their act together. If they seem like they don't know what they are doing, run! Look into their history and prior offerings. Are the properties "A" grade commercial buildings, or something less desirable? Ideally, this should be their only business. Research the area where the new property is located. A local realtor or chamber of commerce can be very helpful in describing the area and the local economy. The property should already be almost fully occupied with quality tenants. If it was recently "refurbished" be sure to find out why that was necessary and what exactly was done. Be careful with Limited Partnerships when only one or two major players make all the decisions. Ask how they find the properties and what criteria they use to select them. Quality properties are hard to find and sell out quickly. Unless you have extensive experience in commercial property, don't get together a bunch of your friends and try and choose this property on your own. Ask yourself if you would like your office in that building, or see your doctor there, or shop in those stores. Remember in real estate the quality properties always remain more desirable, even when the mediocre properties start to lag.
Second, don't choose an Accommodator that has not done many, many of these transactions. This Qualified Intermediary is the one that makes sure all the documents and money transfers meet all the guidelines. He will set up your LLC. Your family attorney or estate planning attorney is most likely not your best choice. The last thing you want is the IRS sending you a hefty bill for taxes or penalties due to an incompetent or inexperienced Accommodator error.
Third, don't skimp on the property management company. They are extremely crucial to the property performance. You will be depending on them to handle the day to day problems that arise, carry the proper insurance, pay the property taxes on time, and keep your building fully occupied and in tip top shape. This company should offer you a long term triple net lease that has your annual income percentages spelled out, along with scheduled increases. There aren't many out there willing or able to do this. Ask to see their track record with other properties, and for a list of any judgments brought against them. Ask them if they've ever requested special assessments, or had any foreclosures. A good management company is worth its weight in gold. You want them to make a hefty profit, because their performance is directly related to your investment stability.
There you have it. I'm sure you've heard the saying "Penny wise and Pound Foolish". This is one time hiring the best will definitely bring you the most favorable results. It should truly be a win-win situation for everyone involved.
If you avoid the 3 major mistakes for the 1031 exchange into a tenant in common property, you will be the one saying "I told you so" as you collect your monthly check and watch your investment grow.
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