The private annuity is a sale of an asset, typically to a close family member or related party, in exchange for an unsecured promise from the buyer to make periodic payments to the seller for their lifetime (like a lifetime annuity).
- Income for life for the seller.
- Asset removed from the seller's estate (unsecured promise to pay).
- Business stays within the family.
- Payments terminate at the death of the seller (nothing to include in the seller's estate).
- Appreciation on the property (after the exchange) escapes gift and estate taxation.
Transfers in Trust
An effective tool to transfer business assets out of an estate is by the use of trusts. The trust can be revocable or irrevocable; however, irrevocable trusts will remove the business assets or property from the trust of the owner and revocable trusts will not.
Effective trusts to use for property transfers:
- GRATs, GRUTs and GRITs
- ILITs - Irrevocable life insurance trusts (covers the costs of estate taxes on the business property)
- Irrevocable trusts with family members as the beneficiary of the business interests (both inter-vivos and testamentary)
- Pourover trust- business assets are designated in the will of the owner
An intra-family loan is a loan made between family members for the purchase of family property or business interests. If the seller charges the borrower (family member) an interest rate comparable to the applicable federal rate, the transaction can be very beneficial for both parties as long as timely principal and interest payments are made on schedule.
Properties of an Intra-Family Loan:
- Loans are an effective means of transferring wealth when interest rates are low.
- Easy way for younger generations to obtain financing.
- Junior family member pays senior family member principal and interest on the loan used to buy the property.
- Not considered a gift if interest rate charged is comparable to the federal rate.
- Interest is taxable to the seller and expensed by the buyer.
Bargain Sales, Gift or Sale Leaseback, Intentionally Defective Grantor Trust
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