What Is A Private Annuity?

by Bruce Givner on January 3, 2012

A Private Annuity is a true estate tax miracle.  It is a way for the parents to transfer an asset to the children, or a trust for their benefit, without having anything included in the parents’ taxable estate upon their deaths. It is, in that respect, an alternative to a transfer by the parents to the children in exchange for an installment note; a SCIN (self-canceling installment note); or a GRAT (grantor retained annuity trust).

"Tax Saving Secrets Of Millionaire Clients" - Request Your Copy Today

A Private Annuity is essentially an installment note plus a mortality component. So, assume Mom and Dad are ages 60 and 65, and they are selling an asset worth $1,000,000 to the trust for their children. Assume that in a regular installment sale, at 5% interest, the parents might receive payments of $5,000 per month over 30 years back from the children’s trust.  In a Private Annuity, the children’s trust is bargaining for the right to stop making payments upon the surviving parent’s death. For that privilege the parents must charge the children’s trust a premium, and that premium is based on a mortality table. Therefore, instead of the parents receiving $5,000 per month, depending upon the prevailing interest rates and, of course, depending upon the ages of the parents, the children’s trust might have to pay $8,500 per month, with the extra $3,500 per month compensating the parents for the fact that the payments will stop on the death of the surviving parent. Assuming the children have the cashflow to make that increased payment, the estate tax result is superb: nothing is included in the parents’ estates: complete estate tax exclusion. An estate tax miracle.

Find out what Givner & Kaye can do for you. Contact us today. www.GivnerKaye.com (310) 207-8008

Leave a Comment

Previous post:

Next post: