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Private annuities transfer assets for periodic payments for life, often used in estate planning to reduce taxes. Payments are taxable as earned interest, and the arrangement is irrevocable.
A private annuity is an arrangement that transfers assets from one party to another person or entity in exchange for periodic payments for the duration of your life. The beneficiary is the one who transfers the assets, while the recipient is the obligor. One requirement for an exchange to qualify as a private annuity is that the debtor cannot be in the business of providing annuities, such as an insurance company.
Estate planning is where one might look at a private annuity. This method can eliminate or greatly reduce estate or gift taxes in exchange because it changes the transfer from a gift to a sale. The parties involved can be individuals or a trust established to transfer assets and money.
Private annuities are often set up between family members to avoid estate taxes. For example, a parent or grandparent can use the private annuity method to transfer stock, business interests, or other assets to a child or grandchild in exchange for periodic payments for the remainder of the parent’s or grandparent’s life. This transfer is a legally enforceable contract, although not guaranteed; Since the payments end with the death of the beneficiary, there is no inclusion in the estate.
Only the portion of the payment to the beneficiary that is considered earned interest is taxable to the beneficiary during his lifetime. The remainder of the payment is considered the original basis of the property, which is treated as a return of principal. As long as the annuity payments are set to end on death from the annuity, the transferred property will not be subject to estate taxes.
The private annuity arrangement is similar to an insurance policy for estate tax planning. In the United States, payments are based on life expectancy and interest rate tables established by the Internal Revenue Service (IRS). Beneficiaries can start their payments at any time, as long as they are under the age of 70.5. Once started, each payment will be equal and will be paid in equal intervals.
A private annuity can lower taxes and allow the beneficiary to receive a stable income throughout his life. This is considered a sale and not a gift, and a portion of the payments will be taxed as interest earned. It is generally important for a person to remember that once a private annuity is created, it is irrevocable and the beneficiary will lose control of the assets involved.
Smart Asset.
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