Annuities can help mitigate capital gain taxes
If you hold a do well with a piece of real estate, stock, or a family business, the good news is that you made a lot of money. The bad news is that you may owe a lot in capital gains taxes.
In fact, many people are afraid ever to sell their investment for fear of the tax burden. However, there is an excellent strategy to defer capital gains taxes and create retirement solutions for you and your family.
The Private Annuity Trust (PAT) defers the impact of capital gains taxes, sometimes for decades, without penalty or interest. The deferral takes place because the individual receives the sales proceeds in a lifetime income stream from the private annuity contract. (The term “annuity” refers here to the income stream; a PAT is not an annuity product.)
Let’s compare the sale of a $1 million asset via a normal taxed sale versus using a PAT. The assumptions involved include 1) a cost basis of $200,000, 2) a 6 percent annual return, 3) a couple both aged 45 as the investors, and 4) a 15 percent federal and 9.3 percent state capital gains tax, plus 25 percent ordinary income tax rates.
Under the normal taxed sale, the couple would start to receive retirement income starting at age 65 of $228,000 per year for the balance of their assumed life expectancies, or an after-tax life payout of $3,540,000. By using the PAT, the couple would receive $307,000 per year, or an after tax life payout of $4,541,000.With this scenario, the couple would create an additional $1,564,000 of retirement income by using the PAT. Additionally, there are other very important benefits:
1) The PAT asset is removed from the estate, thereby saving on estate taxes.
2) There is never any probate or gift tax owed on the PAT asset; and.
3) The family remains in control of the asses.
The uses are varied for a PAT and careful consideration of all of the risks and rewards should be explored fully. As with any estate, tax or financial planning strategy it is vital that you consult with a professional familiar with these types of transactions.
Mark Singer, CFP, is a radio talk-show host and president of Safe Harbor Retirement Planning, LLC, located in Lynn (www.retire55.com ).