Estate Planning: What Exactly is a Private Annuity?

Couple talking to an estate planning attorney

A private annuity is a strategy used in estate planning. It involves transferring property from a trustor’s (the estate owner) estate to their children before their demise. Considering that the trustor has a properly established private annuity, they could avoid gift and estate taxes while still obtaining income while they’re still alive.

According to estate planning attorneys in Utah, establishing a private annuity involves selling an asset to the trustor’s child or other inheritors in exchange for an informal promise to recompense the trustor with annual payments as long as they live. As the asset would be transferred to somebody else, it would be no longer part of the estate, but the yearly payments would still be part of the estate.

When a Private Annuity Might be Beneficial

A private annuity might be advantageous when you own a property that has a low basis because the capital gains would be recognized over a couple of years instead of just one year.

Furthermore, if the depreciation recapture rules apply to your property, the recapture would be extended in multiple years while you’re being compensated. It is for this reason that private annuities are typically used for assets like cash, securities, real estate, and business interests. It’s particularly beneficial when used on a property that has a potential for substantial capital gains.

How a Private Annuity is Structured

Every payment you get is essentially a return that’s partly tax-free and denotes an amount that’s partially composed of interest and capital gain. Your inheritors would, in turn, get a basis in the property you sold them that’s equal to the payments they give you. Once the value of the private annuity is equivalent to the value of the property, your inheritors could then sell the property and won’t need to pay the capital gains taxes. Your inheritors could then do whatever they want with the sales proceeds.

How to Establish Private Annuity Payments

Woman signing contract agreementWhen setting up private annuity payments, you have to first determine your property’s fair market value. You could then establish the actual payment amount by looking at the annuity tables set by the IRS. As per the IRS table, you would receive all of the property’s interest and value if you don’t pass away before your life expectancy. Otherwise, your inheritors won’t need to continue making annuity payments even if the value of the annuity has yet to equal the value of the property.

However, if you surpass your life expectancy, you would receive payments in excess of the value of the property, along with interest. Do note, though, that you can’t refer to the IRS tables if it’s highly likely that you won’t get to live beyond a year from the date of annuity or if you have a terminal illness.

This is by no means an in-depth guide to private annuities, so if you’re interested in establishing one, it’s best to consult an experienced estate planning attorney. Your attorney would help you figure out whether a private annuity would be beneficial for your case or if you’re better off using other estate planning strategies.

About Eleanor Sharp
Eleanor Sharp is the author of AGSE Law. As a paralegal, she has worked with attorneys in many fields to ensure their clients get the best advice and representation. She is passionate about helping people understand the complexities of the legal system so they can make better decisions for themselves. Eleanor loves reading, travel, and spending time with her family. She hopes her articles will help others navigate life’s legal intricacies with confidence.