Private Annuity

By: Martin M. Shenkman, CPA, MBA, JD

A private annuity is an estate and financial planning transaction that typically involves a senior family member selling an asset, often (but not always) an interest in a family business, to a younger family member, say a child in the business (but see below regarding trusts). The child/buyer pays the senior family member an annuity (in many ways similar to a commercial annuity most people are familiar with) for the remainder of the parent/seller's lifetime. This approach/technique can provide an excellent way for a parent to rid themselves of the risks and issues of business returns and instead receive a fixed sum for life to live on. If the parent/seller/annuitant dies before their actuarial life expectancy, from an economic perspective the child/buyer/obligor will have potentially paid much less and the estate of the parent will be reduced. However, if the parent outlives their life expectancy, the child/buyer will pay more for the business then it may have be valued at. The taxation of private annuities was changed by proposed Treasury Regulations so that the seller must now recognize all gain on the sale in the year of the sale. This income tax consequence has resulted in many private annuity transactions being structured with the buyer being a grantor trust (defective trust) so that no gain will be recognized on sale. When this type of transaction is structured the trust should have some economic viability to mitigate against IRS claims that the seller/parent has retained an interest in the trust (thereby bringing the assets sold back into the parent/seller/annuitant's estate).

Our Consumer Webcasts and Blogs

Subscribe to our email list to receive information on consumer webcasts and blogs, for practical legal information in simple English, delivered to your inbox. For more professional driven information, please visit Shenkman Law to subscribe.

Ad Space