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

Comparison With a Taxed Sale:
It is important to understand that payment of the capital gains tax to the IRS is done with an "easy installment plan". There is no interest or penalty on these deferred payments of the tax. On top of that the tax payments will be made with depreciated dollars. The tax dollars will be worth far less than they are today due to inflation. Yet the underlying investment will grow in value, probably at more than the rate of inflation.

In our example, the $1,000,000 property placed in the trust was sold for cash by the trust. The trust accrues interest to the annuitant on the $1,000,000. (The interest rate is dictated by the IRS under Section 7520 of the Tax Code.) So the annuitant has the entire untaxed value of the sale, $1,000,000, growing and earning interest for him. He should earn much more money than he would if he sold the property and paid the tax up-front. This is due to the spreading of the tax payments over a long period of time.

Let's examine actual numbers and compare the private annuity transaction to a cash sale taxed immediately (see Figure 7A). We start with the $1,000,000 property value. The annuitant's basis is 200,000 leaving a profit or gain of 800,000. This leaves net cash of 805,600 in a direct sale vs. 1,000,000 in the annuity sale (see the tax rate and other assumptions at the end of Figure 7A). We are assuming that the net investment cash earns 6.0% before taxes for the property owner in both sides of the comparison. The property owner or annuitant is age 45 at the beginning, so he will be 65 when he starts to take payments from either of these strategies. Under the direct cash and taxed sale the property owner receives annual payments, on a before tax basis, of 228,314 vs. 307,010 under the private annuity sale. This yields an estimated life payout on an after tax basis of 3,540,493 under the taxed plan vs. 4,541,729 with the private annuity strategy. In addition, projections indicate a 563,377 reserve is left in the trust at the annuitant's death. That is a combined advantage for the annuitant and his family of $1,564,413 more money using the private annuity, based on the assumptions used in this illustration.

In Figure 7B we make a similar comparison. That is, a cash sale taxed immediately vs. a private annuity sale. In this comparison the annuitant(s) is a married couple, using a joint, last-to-die private annuity, both spouses are age 65, and there is no deferral period (private annuity payments begin immediately). Because there is no deferral period to provide long term tax deferred growth, as in Figure 7A above, the total payout to the annuitants is much smaller than in the illustration above. But the concept and relative positive results are the same.