| "I would rather expire at my desk than to
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| | to defer the annuity payments for a
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| sell my business and pay Uncle Sam one
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| | period of time to coincide with the
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| dime in taxes." How many owners that
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| | owner's need to receive these payments,
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| have paid their fair share of taxes for
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| | lets say, for example, ten years During
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| twenty years of building their business
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| | those ten years the trust's investments
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| feel this way? The tax bite is the
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| | or a commercial annuity grow without
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| single biggest factor in an owner's
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| | incurring a tax bite for the business
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| reluctance to sell his/her company.
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| | sale.
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| I have previously written articles
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| | When the annuity payments start, the
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| discussing various aspects of transaction
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| | owner is taxed at his then current tax
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| structures to minimize taxes. As a
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| | rate for the portion of the annuity
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| result, I am often contacted by a
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| | payment attributable to the capital
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| panicked seller that is a week from
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| | gains, his basis (no tax), and
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| closing his business sale as he looks in
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| | depreciation recapture from the sale, and
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| disbelief at his accountant's spreadsheet
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| | the income produced from the annuity.
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| detailing the tax burden of his impending
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| | The annuity pays the owner and spouse
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| sale.
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| | this annuity payment until last to die or
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| Recently, the seller of a Sub Chapter S
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| | until the annuity investments run out. If
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| Corporation with an $8 million
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| | the owner and spouse die, any remaining
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| transaction value contacted me. The tax
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| | assets are transferred to the
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| basis was below $200,000 and $4 million
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| | beneficiaries outside of estate tax
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| of the transaction value was the
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| | liability.
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| assumption of debt. When the dust
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| | If your investments perform at the rate
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| settled, he was looking at a capital
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| | used in the annuity calculation and the
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| gains tax liability of a staggering
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| | last to die lives to their exact life
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| $965,000 while only receiving the
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| | expectancy, theoretically the trust value
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| remainder of proceeds after the
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| | will be whatever the gift portion (7% of
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| assumption of debt. The assumption of
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| | the selling price) has grown to.
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| debt is considered as part of the capital
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| | However, if the investments do very well
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| gain for tax purposes.
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| | and you outlive the life expectancy
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| The owner sent his accountant's
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| | tables, you could receive payments well
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| spreadsheet to me and since I am not a
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| | in excess of the original annuity face
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| tax accountant, I sent it to my tax
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| | value. Those excess payments would be
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| wizard at BDO Seidman. He found a few
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| | taxed at your then current income tax
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| small tweaks, but said that there was not
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| | rate.
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| much that could be done from an
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| | If the investments do well and the value
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| accounting standpoint for this owner.
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| | grows above the required annuity reserve
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| When I reported this back to the seller I
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| | amount, the excess can be distributed to
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| could feel his disappointment and
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| | the beneficiaries as income.
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| frustration.
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| | In the simplest of views, this acts like
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| So I began my quest for a better
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| | an IRA. You are not currently taxed on
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| solution. After several dozen phone
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| | the amount you put in, it grows tax
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| calls to my professional network, I was
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| | deferred and you pay taxes upon
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| directed to a little known vehicle called
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| | distribution, hopefully at a far more
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| a Private Annuity Trust. This vehicle has
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| | favorable tax rate. In the case of the
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| passed the scrutiny of the IRS and the
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| | frustrated seller from above, what if he
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| Tax Court. It is not a way to avoid the
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| | deferred all payments by ten years on the
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| payment of taxes, rather a method of
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| | full sale price and the $965,000 in
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| deferring them with substantial economic
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| | capital gain taxes owed? He had a life
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| benefit to the owner's beneficiaries.
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| | expectancy of 20 years beyond the start
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| Below is a simplified description of the
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| | of the distributions. The $965,000 that
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| process. As the owner contemplates the
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| | he did not pay in taxes grows at 7% to
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| sale of his business (or any highly
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| | $1,939,323 by the time distributions
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| appreciated asset for that matter) he
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| | start.
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| "sells" it to a trust PRIOR to its
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| | Every annuity payment contains a portion
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| ultimate sale. This trust purchases the
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| | of the capital gain or 1/20th of the
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| asset at FMV and exchanges an annuity
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| | total capital gain annually. Therefore,
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| payment stream complete with IRS life
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| | the bulk of the resulting investment
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| expectancy tables and interest rates. The
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| | value of the capital gains tax deferral
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| trust then sells the company to the buyer
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| | provides huge returns for years to come.
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| to fund the annuity.
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| | If it seems too good to be true, remember
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| The transaction is accompanied by a gift
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| | it is tax deferral and not tax avoidance.
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| to the trust in the amount of 7% of the
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| | The owner has sold his business first to
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| face value of the annuity. This is so it
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| | the trust in return for an annuity
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| qualifies as a trust by creating an
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| | payment stream. The owner cannot control
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| entity with economic value. Remember,
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| | the trust. To the extent that the owner
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| the private annuity is viewed as having
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| | wants immediate access to some of the
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| zero economic value because the asset
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| | sales proceeds, he would pay all taxes in
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| minus the obligation theoretically equals
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| | proportion to the amount he is receiving.
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| zero.
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| | In cases like the one above, this tax
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| The trust is in the name of the owner's
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| | deferral tool can have a dramatic impact
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| beneficiaries and all aspects of the
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| | on the financial status of the owner and
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| trust are controlled by the trustees
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| | his heirs by allowing the tax deferred
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| beneficiaries and not by the owner. The
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| | funds to compound for many years before
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| trust for the benefit of the heirs owns
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| | their ultimate distribution and the
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| the assets and owns the annuity payment
| |
| | payment of any tax.
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| obligation. The trust can be structured
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| |
|
