Private Annuity Trust, Ensured Installment Sale (Structured Sale)
Warning: As of October 18, 2006 Private Annuity Trusts (PAT) are no longer recognized by the Internal Revenue Service (IRS) as legal means for managing assets tax deferred! The Private Annuity Trust has been replaced with The Ensured Installment Sale (Structured Sale), which will be discussed later. The following information applies only to zurich Annuity agreements funded prior to October 18, 2006, which are still honored by the IRS.
PRIVATE ANNUITY TRUST: WHAT IS IT?
A Private Annuity Trust works very similar to an Immediate Annuity, although you will use assets other than money to fund this Annuity. Typically, you transfer ownership of a home or land with high value to a Trust. The Trust agrees to make lifetime payments to you, and can then sell the asset you gave them and use the money to fund this Annuity agreement through investments.
You cannot use other retirement funds such as a 401k to fund a Private Annuity Trust, but you can add multiple properties to increase your tax break and Annuity payment. If you decide to add an additional property to your Private Annuity Trust you must create a new Annuity agreement for each property, unless your original agreement contained a provision to include additional assets at a later date.
Each new agreement will have a different deferral period which creates an added benefit to you by providing both immediate and long term income. The withdrawal period from a Private Annuity Trust must begin by age 70 ½, but you can always choose to receive payments sooner.
When structuring a Private Annuity Trust, you must name a Trustee who will be responsible for controlling the investments of your assets in the Private Annuity Trust. The Trustee can be an adult child, relative, close friend, attorney, or anyone else other than you or your spouse. By law, the annuitant is not allowed to have any direct control over the investments of their Annuity. You may make council to the Trustee but cannot have any direct contact with the assets once they are transferred into the Private Annuity Trust, and your transfer of ownership is irrevocable.
ASSETS TRANSFERRED TO A PRIVATE ANNUITY TRUST: HOW TO ESTIMATE THE ANNUITY PAYMENTS
It is fairly easy to estimate what your Annuity payments will be for the asset transferred into a Private Annuity Trust. The IRS uses the following factors to determine your payment:
- Your life expectancy
- The selling price of your asset
- The Annual Federal Mid-Term Rate (AFMR) effective when your property was transferred (this rate will be the rate used for the duration of your Annuity)