Private Annuity Trust

June 2, 2006 at 3:47 pm 1 comment

In a typical arrangement, you sell appreciated assets — residential or commercial real estate, artwork, securities, even closely held businesses — to a trust, in exchange for a series of fixed annuity payments that last for the rest of your life. The trust then goes ahead and sells the appreciated asset to an end buyer. The cash proceeds are invested by the trust, and are used to fund your annuity payments.

By selling the property in exchange for an annuity, you avoid paying the upfront capital gains that you would have owed if you had simply sold the asset outright. Instead, you are taxed on the annuity payments when they come out of the trust, which spreads out the taxes over a longer period of time. What's more, you can defer receiving the annuity payments for years, thereby further postponing your tax payments.

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Entry filed under: Personal Investing, Real Estate.

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1 Comment Add your own

  • 1. Jeremy  |  June 3, 2006 at 10:19 pm

    Of course the other issue is the “time value of money”. The $X payment you’ll receive 2 years from now is worth less than having $X right now. Kinda like how lottery winners are always advised to take the lump sum rather than the 25 year installments.

    So taking payments would only be worth it if the tax savings is greater than set-up costs + the lost interest from having the money to invest immediately.

    Losing out on money just to pay less tax doesn’t seem worth it to me.



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