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Our goal is to provide each of our clients with as much information as possible about the Private Annuity. As you will see as you review the following material, there is a lot of information to digest and consider. Many legal aspects may be complex and confusing. We want you to know we are available to speak with you about any legal aspects of the Private Annuity at your convenience either over the telephone or in person at the Spiegel and Utrera, P.A., office nearest you.

Do you want to transfer assets from one generation to next, maintain family control of the transferred assets while you retain lifetime income, defer capital gains, eliminate estate taxes and gift taxes?

The Private Annuity is a tool by which you can get assets out of your estate and into the hands of your children prior to your death. If it’s set up properly, it will defer capital gains, avoid estate and gift taxes and continue generating income to you for the rest of your years.


A Private Annuity is a sale of assets between two parties. A Private Annuity involves the transfer of assets from a seller in exchange for a buyer’s unsecured promise to make a periodic stream of fixed payments. The party transferring assets may be an individual or a revocable living trust; the party to whom the assets are transferred may be an individual or an entity such as a trust, a partnership, or a corporation. Private Annuities are usually created between family members. For instance, an elderly parent might create an annuity agreement with a child. The parent would then transfer assets to the child in return for the child making regular payments to the parent for life. To avoid any gift taxes, the promised annuity payments are based upon Internal Revenue Service published interest rates and life expectancy tables. As interest rates decline the value of each annuity payment also decreases, making the Private Annuity sale a more attractive estate planning vehicle in such periods of low interest rates. Further, the Private Annuity is a sale and not a gift, it will not be subject to the generation-skipping transfer tax.

For example, Mary, age 70, sells her apartment building worth $1,000,000 which generates an annual income of $120,000 to her son Michael in exchange for a Private Annuity. At the time of the sale the applicable federal funds rate is 5.6 percent and Mary’s adjusted life expectancy is 15.5 years. If Mary receives an annuity of $118,238 per year from Michael for the rest of her life, then based upon the Internal Revenue Service actuarial tables the present value of the annuity received will be considered equal to the fair market value of the assets conveyed, and no gift tax will be created by the transaction. On the other hand, if Mary received an annuity of $106,414 per year from Michael for the rest of her life, then based upon the Internal Revenue Service actuarial tables the present value of the annuity received would have been $900,000, and Mary will have made a taxable gift to Michael of $100,000 (1,000,000 - $900,000).

When properly structured, Private Annuities eliminate federal estate tax on the value of the transferred assets. A party transferring assets also saves probate fees to the extent that Private Annuities remove the transferred assets from the transferring party’s probate estate.

For example, Jack, age 65, owns 100% of the shares of stock in a closely held corporation (ABC Corp). Jack has one child, Sam, active in the management and operations of ABC Corp. Jack, a widower, wants Sam to succeed him as owner of 100% of the stock of ABC Corp. A substantial portion of Jack's estate consists of stock in ABC Corp that an appraiser valued at $1,000,000. At the time of the sale of 100% of the stock of ABC Corp to Sam, the applicable federal funds rate is 3.6 percent and Jack’s adjusted life expectancy is 20 years. Sam will receive an annual income of $150,000 from ABC Corp and will make annual annuity payment to Jack in the amount of $83,777.35. Assuming Jack's entire estate does not appreciate, the taxing authorities would extract $450,000 in federal estate tax if Jack died in year 2008 without a Private Annuity arrangement with Sam. These facts assume a maximum federal estate tax of 45% in 2007-2009, after which time the federal estate tax is repealed. However, if Jack had transferred his stock in ABC Corp to Sam as mentioned above in exchange for Sam’s promise to make annual annuity payments for Jack's life, Jack will have successfully removed $1,000,000 from his taxable estate and saved $450,000 in federal estate taxes.


The advantages of Private Annuities are:

  • Private Annuities may remove the transferred assets and any future appreciation from the potential gross estate of party transferring the assets without gift tax implications;
  • Private Annuities may allow the party transferring the assets to defer the recognition of gain and income, spreading the tax over a fixed period, the life of the party transferring the assets, or the joint lives of two or more parties transferring the assets;
  • Private Annuities may offer the opportunity to shift income to family members in lower tax brackets;
  • Private Annuities may allow the party transferring the assets to maintain wealth within the family;
  • Private Annuities may permit the party transferring the assets to transform a unique, but illiquid, asset into a liquid stream of income and a diversified portfolio;
  • Private Annuities may deliver a steady stream of income for party transferring the assets during retirement age and beyond;
  • Private Annuities may be a viable strategy in advance Medicaid planning. If you apply for Medicaid in next few years then you can transfer assets to meet Medicaid eligibility requirements by transferring assets to relatives or family members or altering the form of the assets so that you can spend down your income and assets to qualify for Medicaid;
  • Private Annuities may enable the party transferring the assets to avoid the potential cost and delay of probate;
  • Private Annuities may serve as potential asset protection devices; and
  • Private Annuities may enable the party transferring the assets to qualify for favorable estate and income tax benefits.

The Private Annuity transaction permits the use of non-cash assets to be exchanged in return for the annuity income. This includes low-basis securities, real estate, farms, ranches, incorporated business or an interest in a corporation or a limited liability company. In a taxable transaction, your annuity payments consist of three components: ordinary income, capital gain, and return of capital. This tax treatment allows you to defer the recognition of gain over the term of the Private Annuity. A Private Annuity saves estate tax by removing the transferred assets from your gross estate. You will enhance the estate tax savings by further estate planning, gifting, or otherwise consuming most or all of the annuity payments. The Private Annuity also removes the future appreciation in the value of the asset sold from your estate, since any appreciation is realized by the buyer.

No Gift Tax. A transfer of assets using a properly structured Private Annuity will avoid the imposition of gift tax. The Internal Revenue Code generally imposes a tax on all gratuitous transfers of assets whether outright or in trust. The simple reason that gift tax is avoided by using a Private Annuity as the transfer mechanism is that the Private Annuity transaction will be treated as a sale of assets for gift tax purposes.
Estate Tax Savings. A Private Annuity can reduce estate tax by removing assets from the estate of the party transferring the assets and therefore reducing the taxable estate and subsequently any estate tax owed. The reason for this is that Private Annuities are designed to cease making payments at the death of the party transferring the assets. Because of this, there is no value remaining in a Private Annuity that could be included in the taxable estate of the party transferring the assets. However, with a Private Annuity estate taxes are only minimized if the party transferring the assets passes away before his actuarially determined life expectancy or if the party transferring the assets spends what is received from the party to whom the assets are transferred on items that do not re-build the estate. If the person lives to reach that age, the party transferring the assets will have received back the entire fair market value of the assets originally transferred. The annuity payments received by the party transferring the assets would be considered part of the taxable estate of the party transferring the assets. If the party transferring the assets receives back all the value that was originally transferred there would be no estate tax savings.
May Reduce Income Tax. In a properly structured Private Annuity transaction no gain is immediately recognized by the party transferring the assets if the transferred assets have capital gains associated with it. Basically, the Internal Revenue Service has determined that the party to whom the assets are transferred will not be subject to immediate taxation on the gain associated with the transfer of appreciated assets. Instead, the gain can be reported ratably over the life of the party transferring the assets. Further, buyer of the assets in a Private Annuity transaction receives a fair market value basis (the value of an asset for tax purposes when computing the taxable increase in value) in the assets transferred. This provides the opportunity for the party to whom the assets are transferred to sell assets at a reduced gain.

For example, if Jon sold his property worth $5 million but which cost (basis) is only $500,000 to his friend Mark, there would be tax due on $4,500,000. However, if the Jon sold the property to his son, Mark following a transfer through a Private Annuity, there would be no tax due as long as the property was sold for $5 million or less.


The degree of success in a Private Annuity transaction depends upon a number of factors. Here are some of the factors that will favor use of a Private Annuity:

  • You want to transfer your rapidly appreciated assets;
  • You as owner of certain assets have an actual life expectancy shorter than the assumptions in the Internal Revenue Service published life expectancy tables and you are not contemplating death within one year and will likely live for more than few years. If you suffer from infirmities of old age, but not from any life threatening illness or disease then you should obtain a written prognosis of life expectancy from one or more licensed physicians or specialists, for example an Oncologist;
  • You are experiencing a period of low interest rates;
  • You will consume or dispose most of the payments after the transfer of assets in a Private Annuity transaction;
  • You as owner of certain assets desire to maintain family control of the transferred assets through a transaction with the intended heirs or a trust for the intended heirs;
  • You are offered a more viable alternative with a Private Annuity than with a commercial annuity, especially when a large part of the estate of party who is transferring assets consists of an interest in a closely held business;
  • You as owner of certain assets want a source of retirement income;
  • You as owner of certain assets want to employ an asset protection device or engage in advanced Medicaid planning;
  • You want to transfer assets to parties who will have adequate means to meet the annuity obligation other than the transferred assets.

The Private Annuity may achieve many of your goals, if used correctly. It is an important estate-planning tool which is often overlooked by financial advisors. Special care should be taken in the drafting and design of legal documents relating to the Private Annuity in order to survive the scrutiny of the Internal Revenue Service and to fully benefit you. If you have the right set of goals and net worth, the Private Annuity may be the solution that best fits your wealth transfer objectives. Let Spiegel & Utrera, P.A., draft and design the Private Annuity Agreement for you with special care for a one time fee of $767.95

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