DEFERRING CAPITAL GAINS TAXES WITH THE PREMIER VI PRIVATE ANNUITY TRUST^©

Fixed Nature of Annuity Payments:
It is important to understand that the annuitant's income is locked in to a fixed payment amount that is determined by three factors: Private annuity face value, annuitant's age and the IRS stipulated interest rate. No matter how much the trust earns the annuitant cannot receive more than his fixed payments. Any excess that the trust earns must be held for or paid to the trust beneficiaries. This should not be viewed as a negative feature however. The annuitant will receive all his principal over time and all the accrued interest on the unpaid balance of his principal. And, he is receiving it in a tax advantaged manner. The annuitant's chief consideration should not be on what may be left behind in the trust. It should be on whether or not he is benefiting more from the private annuity than he would from a taxed sale (and that assumes he is self disciplined enough to invest and manage his own money from the taxed sale).

Taxation of Annuity Payments:
With Figure 8 we explain how the annuitant’s private annuity payments are taxed. First, this annuitant has a cost basis in his property, and a proportionate share of that basis is returned to the annuitant each year. The basis portion is tax free to the annuitant. Another part of each year’s payment will be a proportionate share of the capital gains, and that portion will be taxed at capital gains rates. The last part of the payment is ordinary income, and is taxed accordingly. The reason the annuitant receives ordinary income is that the private annuity always earns interest on the unpaid balance, and interest is paid out each year on top of the basis and capital gains portions.

The proportionate share of tax free return of basis and capital gains is determined by the annuitant’s life expectancy at the time that the payments begin. If the annuitant has a 15 year life expectancy, he will receive 1/15th of his basis and 1/15th of the capital gains each year. With a 20 year life expectancy the annuitant will receive 1/20th of basis and 1/20th of capital gains each year. If the annuitant lives longer than life expectancy, he will have received a 100% return of his basis and capital gains at full life expectancy. So all further payments will be treated as 100% ordinary income to him.