This eliminates a clever method of deferring tax on the sale of a business interest or real estate. But there’s an alternative to private annuity trusts that might fit your needs.
Strategy: Weigh the benefits of a “structured sale.” It’s a twist on a traditional installment sale, without the usual security risks.
With the demise of private annuity trusts, financial planning firms are marketing structured sales. If you want to “cash out” property in anticipation of your retirement, this might be a good move.
Here’s the whole story: To defer capital gains tax on an installment sale, you must receive payments over two years or more. You pay the tax when you actually receive the payments. Big drawback: You run the risk that the buyer won’t be able to fulfill the payment obligations.
You might be reluctant to accept such an agreement because a default would require you to take back property after it has depreciated due to market conditions, mismanagement or both. Plus, you will incur legal expenses on a foreclosure.
A structured sale transfers the buyer’s obligation to a third party. In turn, the third party obtains an annuity from a reputable and highly rated insurance company. You’re named as the sole beneficiary of the guaranteed annuity.
That gives you peace of mind that regular payments will be made regardless of the buyer’s circumstances. Payments aren’t taxable until received, spreading the resulting tax liability over a period of years. In other words, you can have your cake and eat it, too!
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