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THE PRIVATE ANNUITY We are getting a number of inquiries from international law firms in both Europe, Central and South America and the Orient asking about the new tax laws as they relate to private annuities Here are a few articles which you can easily use as a starting point for reference: Revenue Ruling 9-74, 1969-1 CB 43 and Lloyd v. Comm., 33 B.T.A. 903 (1936)nonacq. XV-2 CB 39 (1936), nonacq. withdrawn and acq. 1950-52 CB3 and additional authority cited in the IRS Notice of Proposed Rulemaking, Oct. 18,2006, REG. 1-141901-05, full text at IR-2006-161, Oct. 17-2006 What is the private annuity? In a typical situation, the advisors would present a client with highly appreciated property, where the desire was to exchange the property interest for a stream of future payments, an annuity. The client would transfer the appreciated property to a private annuity trust which in return would contract to make the desired stream of payments. The trust would sell the property to a third party, receiving cash in return for the property. Since the trust would have a cost basis equal to the full value of the property, no income taxes on the sale would be due until the client began receiving payments. Owners/investors would use offshore life insurance policies to curtail taxes owed when the money is received. What has happened is that there is a perceived difficulty in determining the value of the private annuity contract for U.S. income tax purposes. THE PARTY IS OVER. IF THERE IS A GAIN OR LOSS, THE ENTIRE PROFIT IS RECOGNIZED AT THE TIME OF THE EXCHANGE OF PROPERTY FOR THE ANNUITY, WITHOUT REGARD TO THE TAXPAYER’S METHOD OF ACCOUNTING. NO LONGER WILL THE TAXPAYER BE ABLE TO CONTINUE TO DEFER THE RECOGNITION OF GAIN AS BEFORE. The good news is that there are other planning strategies which will accomplish the goals of most clients. Further, for those who are foreign nationals, there are additional planning techniques. Feel free to phone our office to further discuss these. Saul Larner, Ph.D., LL.M. |
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