The IRS has struck what appears to be a fatal blow in the increasingly popular “Private Annuity Trust”.
As you are probably aware, a Private Annuity Trust has been used where the Client owns a piece of appreciated property with lots of built in capital gains. The idea is that the Client sells the property to a Trust in exchange for a “private” annuity. The annuity is termed “private” because is it paid by the trust, as opposed to a “commercial” annuity being paid by a company in the annuity business. The trust would pay the client a yearly annuity payment as consideration for the property. The idea was that the capital gains would be deferred over the lifetime of the seller, rather than due upon the sale of the property. The trust would then sell the property to a third party in order to pay the annuity.
However, the Department of Treasury and IRS have just issued proposed regulations that would end tax deferral on such transaction. Now, these regulations are just “proposed”, but should be followed until further notice to avoid potential adverse tax consequences. According to the Regs, capital gains tax will be deemed due immediately upon the sale of the property to the private annuity trust, rather than being deferred over the course of the annuity payments. This puts the Seller in the same position as if they had sold the property for cash and purchased a commercial annuity.
The result appears to be that if a seller sells property to a private annuity trust, capital gains tax will be due immediately, even though the Seller will receive payments over the course of their lifetime, and will not have immediate access to the funds. As you can imagine, this apparently makes Private Annuity Trusts worthless, and even potentially disastrous, as a method to save capital gains. These rules also make perfectly legitimate estate planning transactions involving Private Annuities much more difficult.
The bottom line is that you should alert your clients that private annuity trusts are no longer a viable option effective today. Apparently, these rules do not apply to Private Annuity Trusts completed prior to today, however, your clients with Private Annuity Trusts completed prior to today should contact their tax advisor to be safe. Please call me at (858) 756-7297 or email me at wardwilsey@wilseylaw.com if you have any questions, about this post or estate planning in general.
