Great Lakes Estate Planning (GLEP) announces Capital Gain/Recapture Tax Deferral using the Private Annuity Trust

Breakthrough trust allows business, real estate and stock owners a way to defer taxes untill age 70 1/2

May 29, 2004 -- "Individuals who own securities, real estate, businesses or other appreciated assets often are stymied in selling the assets because of the capital gains tax." said Len Ostrowsky, an Estate Planner with Great Lakes Estate Planning in Oak Brook Terrace, IL. Capital gains taxes are owed on the profit from the sale of any asset held longer than one year. The federal capital gains rate is 15% on most sales of significant size. State taxes can tack 5% to 10% more onto that. The net result can easily reach 20%.

There is a double whammy when significant depreciation has been taken on the asset. Not only will there be capital gains taxes to pay, but the depreciation may require recapturing. Depreciation recapture subjects the full depreciation dollar amount to a special income tax rate of 25%. An installment sale will defer the capital gains tax but not the recapture tax. Many installment sales are abandoned because the immediate recapture taxes were greater than the down payment the seller would have received.

Both capital gains and depreciation recapture taxes must be paid in full in the taxable year of the sale. "Great Lakes Estate Planning offers a plan to reduce the capital gains and depreciation recapture tax bite through long-term deferral of the tax." said Mr. Ostrowsky. The tax treatment of the plan has been thoroughly documented by specific IRS publications, court cases and legal reference texts. The plan is known as the Premier VI Annuity Trust.

The Private Annuity does not eliminate the taxes, but rather defers them for long term, often for decades, and with no penalty or interest for doing so. The deferral takes place because the property owner receives his sale proceeds in a lifetime income stream from a private annuity contract. Capital gains and recapture taxes are paid as the income stream is received."Nothing is given away to charity as happens with the competing strategy known, as a charitable remainder trust. Why give away your fortune if you don't want to? If you want your heirs to receive your hard work and remove the asset from your estate, all while receiving an interest free loan from the government you can." said Len Ostrowsky. The Private Annuity allows the entire principal and accrued interest to be paid to the property seller, whereas the charitable remainder trust pays income (interest) only. In most cases the Private Annuity yields more bottom line dollars to the property seller than the charitable remainder trust does.

With the Private Annuity the property owner places the appreciated asset into a trust, rather than directly selling it to the buyer, the trust belongs to and is controlled by the seller's family. Its beneficiaries are the heirs or children of the property seller. The trust "purchases" the asset from the seller. Instead of cash purchase the trust pays the seller with an annuity contract. The annuity contract is a private arrangement issued by the trust itself and is not a commercial annuity from an insurance company. The annuity makes the seller an "annuitant" and that is how we will refer to the seller after this. The annuity contract is a promise to make payments to the annuitant for the balance of the annuitant's life. The payments can be made to either a single person or in a joint last-to-die arrangement to a married couple. Often the first payment on the annuity is deferred, maybe for many years down the road, such as when the annuitant has reached retirement age. But the annuitant has the option of beginning the annuity payments right away. Usually the annuitant has located a "real" buyer for the assets and has negotiated a fair market price for it. The sale is not completed until the asset has been sold twice; first from the annuitant to the trust, and paid for by an annuity, and second from the trust to the "real" buyer in cash.

Neither the sale by the annuitant to the trust nor the sales from the trust to the outside buyer are taxable events at that time. When the annuitant begins to receive annuity payments some of each payment will be subject to a fraction of the original capital gains taxable amount. The taxable amount will be spread out in equal payments over the balance of the annuitants life expectancy. For example, if the annuitant has a 20-year life expectancy at the point the annuity payments begin, then the annuitant will pay 1/20th of the capital gains (and recapture) tax each year. There will be neither penalty nor interest to pay on any deferred taxes. The annuitant will never pay more total tax dollars than he would if he paid the taxes up-front.

If the annuitant lives to the exact life expectancy that the annuity was based on the annuitant will end up paying all the capital gains on the sale. But the first payment may be twenty or more years after the annuity sale. Then the annuity payments spread the capital gains taxes over another twenty or more years. This means that the payment of capital gains taxes could be spread out over a total time span of as much as fifty years with no penalty or interest on the deferral. This allows the trust to use the entire cash proceeds, including the unpaid taxes, to invest in any worthwhile investment. The unpaid and deferred taxes remain in the trust to work alongside the rest of the sale proceeds to produce a much larger amount of income.

"Under this strategy there is a great deal of flexibility in the type of investment that the trust can engage in (unlike the restrictions on a charitable remainder trust). The proceeds can be invested in financial products, securities, and real estate.