Annuity trusts are programs that help defer both high capital gains and depreciation recapture costs. These trusts typically are used for a range of options in estate planning. An annuity trust is a useful instrument for owners of a commercial or residential property who do not have an immediate need for the proceeds from the sale of the property. An annuity trust offers the opportunity to save money for individuals facing high taxes resulting from the capital gains on appreciation of the sold property.
Why Do I Need an Annuity?
One of the primary reasons you should get an annuity is to secure a stream of regular income. However, this is not the reason a lot of people choose to get annuities. Many individuals choose to purchase annuities as tax shelters for capital gains taxes. Through the purchase of an annuity, you can defer the capital gains taxes resulting from the sale of an asset that has appreciated in value. You also can use an annuity to build up an asset: The proceeds from the sale of that asset are placed in an annuity that will pay a stream of income over the life of the annuitant.
Process Involved in an Annuity
If the annuity trust is private and is not issued by a commercial insurance company, the owner of the property sells the property to a trust controlled by family members. You must transfer ownership of the property to the trust prior to the sale of the property. The trust sells the asset to a third party for an identical amount, and the annuity payment is funded by the proceeds of the sale.
Conditions
The seller and trustee cannot be the same person. However, the designated trustee can be a relative, such as an adult child, as long as the adult child is not a dependent. The owner pays tax on the payments from the annuity when received, not on the sum of the property sale. The payment doesn't have to begin after the sale, making this type of annuity suitable for retirement. The payments must begin by age 70 1/2 for the owner to benefit from the tax savings.
The Benefits of an Annuity
If you do not immediately need the proceeds from the sale of an asset, an annuity trust is an investment tool you might consider. You can use either a commercial or residential asset, and it does not matter whether the asset is a primary residence or an investment property. You must, however, own the property outright, free and clear of all debts. A trust annuity not only provides tax savings, but also assists your long-term retirement planning.
