Posted on March 08, 2006 at 16:51:49:
How can you transform an appreciated asset into an income stream and save on taxes? One answer can be a private annuity trust.
Such a trust is appropriate for real estate property that does not qualify for the usual tax exemption of $250,000 or $500,000, or for highly appreciated stock that might trigger a large capital-gains tax. For example, the owner sets up a trust for the benefit of their children and sells the property to the trust, which then sells it to a third party. Instead of a lump sum and a big tax bill, the owners get an annuity for the rest of their lives and a small tax bill each year. They can even borrow from the trust.
The amount of the annuity is based on the sale price of the property, the life expectancy of the owner or owners and the assumed interest rate determined by the IRS. At their death, the remainder of the trust goes to the beneficiaries free of estate tax and without probate.