A private annuity is an invaluable tool for planning your estate. Private annuities are an agreement between the individual (the annuitant) and the person or institution to which the property is being transferred.
Jack Howley, an expert wealth advisor from Naples, FL, shares the basics of private annuities, showing how they can help families preserve their wealth for future generations.
Who Uses Private Annuities?
A private annuity is the most useful for a wealthy family member that wants to transfer assets to younger generations while avoiding most gift and estate taxes. When they are set up properly, private annuities provide tax savings to the annuitant.
Private annuities are also used in business succession situations. A private annuity can transfer the annuitant’s ownership interest to the buyer or family members. This means that the value of the business is not subject to gift and estate taxes. They may still be taxed under capital gains.
Payment can be deferred until the annuitant has reached the age of 70 ½. When payments begin, they will last for the rest of the annuitant’s life.
The Benefits of Private Annuities
One of the most useful benefits of a private annuity is that it provides regular payments that last for the duration of the annuitant’s life. This is in exchange for transferring property like precious metals, securities, and real estate, among other types of assets. This fixed income is generally taxable at the same rates as capital gains, which is preferred over standard income tax rates.
Another major benefit of annuities is that after the transfer has been completed, the value of the property and any future appreciation are not counted under the annuitant’s estate. This means that the annuitant’s tax burden is significantly decreased.
Gift taxes are not owed on private annuities if the property’s value is approximately calculated to be near its fair market value. This means that descendants can avoid gift tax rates, which can be as high as 40 percent.
Another significant benefit of a private annuity is that the ownership of assets is transferred to the buyer or family member immediately. This means that in the event of a catastrophic illness or disability requiring long-term care, the value of the annuity will not interfere with the annuitant’s qualifications for state and federal assistance like Medicaid.
How to Set Up a Private Annuity
In the process of setting up a private annuity, Jack Howley reminds you that you need to know the fair market value of your property. After researching the fair market value, you will need to consult the IRS annuity tables under Internal Revenue Code (“IRC”) §7520.
These tables will show how much money you will receive if you achieve your life expectancy. In this case, you will receive the full amount of the value from the policy and any accrued interest. If you do not live as long as your life expectancy, you will lose money. If you outlive your life expectancy, you will receive more than the property’s value, plus interest.
Situations Where an Attorney is Needed
In the case of non-complicated annuities, it is not necessary to involve an attorney. However, if you are unsure how to set it up or which type of annuity you should have, talk with an estate attorney.
You may also have basic estate planning questions which an attorney best handles. In any case, it is best to avoid putting all of your assets into a single type of investment. While private annuities are low-risk, they should be balanced by higher-risk investments to promote your assets’ growth.
Private Annuities as Retirement Savings
When properly managed, a private annuity can provide a robust source of retirement funding. Private annuities have an advantage over other types of retirement savings because they are not subject to the stock market movements but only to the changes in the assets’ fair market value.
Setting Up Annuities for Your Family’s Financial Security
Being the beneficiary of a private annuity can help families achieve financial stability. Properly taking care of this income means that the older relative making the annuity can have their retirement well-funded. They can benefit from the fact that annuities are not tied to the stock market and that their value will not fluctuate.
Private annuities can be a highly useful way to dispose of assets and prevent onerous taxes from being deducted from their value. When a family sets up a private annuity, they will be saving their beneficiaries the trouble of going through probate court for the assets and having the assets depreciate over time.
Jack Howley promotes private annuities and encourages everyone planning a large estate to look into their benefits. Having a private annuity is useful for both the beneficiary and the giver.