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

Depreciation Recapture:
While we have primarily focused on the capital gains tax, depreciation recapture taxes are also deferred with a private annuity. But in either a cash sale or an installment sale the depreciation recapture is taxed immediately. While an installment sale can spread the capital gains out over a number of years, it cannot do the same with depreciation recapture. Furthermore, installment sales have "related party rules" that prevent an arrangement such as the private annuity trust described above. The related party rules only permit an installment sale with an outsider. This prevents the selling family from using a trust to make a cash sale, with the trust making installment payments to the original property owner.

Depreciation Recapture, Installment Sale vs. Private Annuity.
Both installment sales and private annuities allow for the deferral of capital gains taxes, with the deferral being based on the term of the transaction. With both instruments, regular capital gains are recognized only as cash payments are received by the seller. But, very few installment sales have a term of more than ten years, typically because the longer the term the greater the risk of the buyer defaulting on the deal. Private annuities, on the other hand, always provide deferral for the life expectancy of the annuitant(s). For the majority of annuitants, this term is longer than ten years, usually much longer. Several other advantages of a private annuity vs. an installment sale are:

• Depreciation recapture taxes are deferred with a private annuity, right along with the regular capital gains over the life of the annuitant(s). But in an installment sale, all depreciation recapture is taxed immediately*. While an installment sale can spread the regular capital gains out over a number of years, it cannot do the same with depreciation recapture.
• When an installment sale note holder dies, the unpaid balance of the note receivable is included in the taxable estate of the note holder. When a private annuity holder (annuitant) dies, none of the amount which is unpaid to the annuitant is included in the annuitant's taxable estate. Nothing in the private annuity trust is includable in the annuitant's taxable estate.
• Sometimes the installment sale buyer will default on the note, leaving the seller stuck with a repossession headache and getting property back which the seller doesn’t want. In many cases the repossessed property was damaged or run down by the buyer, creating a loss to the seller in the overall sale/repossession transaction. Private annuity property is typically sold from the private annuity trust for cash, eliminating this problem entirely.
• Sometimes an installment sale buyer pays off the installment note early, forcing early and full recognition of the balance of the capital gains which the seller thought he had deferred. This won’t happen with a private annuity transaction.
• Installment sale treatment is not allowed in the sale of publicly traded securities. The private annuity is not subject to this restriction.
• Installment sales have "related party rules" which prevent an arrangement such as the use of a trust in the private annuity transaction. In other words, you could not legally construct an installment sale trust with the same immediate resale ability as a private annuity trust. As a result, you cannot have deferral and a cash sale at the same time as with a PAT.

Trust Investments:
There is substantial flexibility in making investments with the trust’s funds. The money may be invested in securities, real estate, or even in a new or existing business. Many investment advisors recommend using the trust funds to purchase a commercial variable annuity as the best tax advantaged investment vehicle, while other advisors may recommend mutual funds or individual stocks for the trust. The primary requirement of the trust’s investment program is simply to produce the cash flow necessary for the private annuity payments to the annuitant.

Trustees:
Annuitants cannot be the trustee nor have any direct control over the trust. The trustee may be any adult trust beneficiary or any person who is independent of the annuitants. For example, an adult child who is also a beneficiary may be the trustee. The annuitants’ accountant, attorney, financial advisor, family friend or a relative who is not in the immediate family are all possible choices. There may be either one trustee, or two co-trustees.

Another trustee option is to use a corporate trustee. The National Association of Financial and Estate Planning (NAFEP) can assist with corporate trustee choices, or the annuitant may use a local trust company.