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Private Annuity Trusts - Supercharge Your Retirement
By: Paula Straub
You have made some great investments in Real Estate or in a Stock Portfolio.
Congratulations! Now you are ready to retire on your gains. But wait. To benefit
from your investment appreciation, you're going to have to sell some or all of
those assets.
If you sell your investment property, you will need to pay capital gains tax to
the Federal Government, State, and you will also pay recaptured depreciation. If
you're in California, add another 3 1/3% in withholding. That's a huge chunk of
change, and a big blow to your savings.
If you sell your stocks, you'll be giving up at least 15% to capital gains.
There is also no guarantee that the long term capital gains rate will remain at
15% forever. It could increase down the road.
How can you start receiving income but not get hit with huge amounts of tax?
For real property, there is a 1031 exchange into a tenant in common property.
This works well for investors that don't want to manage property anymore, but
still enjoy the benefits of real estate ownership. This is a subject covered in
many of my previous articles.
There is another powerful concept. It's called a Private Annuity Trust. These
trusts have been around since 1939, but until the last few years have primarily
been used for Estate Planning purposes. The Private Annuity Trust also works
extremely well for Retirement Planning. It is fairly complex to set up and
administrate, so many financial planners, real estate brokers, CPAs and
Attorneys still don't know much about them.
The procedure is basically this.
1. A Private Annuity Trust is established. You, the seller become the annuitant.
2. A fair market appraisal is done to determine property value.
3. The seller can negotiate a sale price at the appraised value.
4. The property is transferred to the trust and the trust is now the seller of
the property and retains the proceeds.
5. The proceeds are invested by trustees (not the annuitant) and an arrangement
is made to pay the annuitant (and perhaps their spouse) in monthly payments for
the remainder of their lives. The capital gains tax is spread out over the
course of your lifetime. If you pass away before your estimated average
calculated life span, the remainder of the assets pass to the beneficiaries. The
balance will be passed free of Estate Tax, Gift Tax, Generation skipping tax,
and Transfer tax. Any capital gains tax still due will be paid before
disbursement.
6. Other properties or stocks can be added to the trust at a later time, and
recieve the same benefits.
As an example, let's say you have a million dollar gain on a property. You might
very well owe 350K in taxes. With a Private Annuity Trust, all one million goes
to work for you, and you can receive montyly income for the rest of your life.
The exact amount is determined by your age and the time you choose to begin
receiving your payments. You have the option to defer receiving payments until
the age of 70 1/2. This allows the assets to grow compounding and tax deferred,
and allows for greater income in the future.
The trust removes the assets from your estate, as the trust now owns them and
the annuitant relinquishes control over how they are invested.
Setting up a Private Annuity Trust can definitely give a turbo boost to your
retirement bottom line. Ask yourself, would you rather give a "gift" to the
government in a big lump sum, or would you like to pay in small chunks and have
the bulk of your profits working for you and earning compounded interest for
years to come?
About the Author:
Find out if you qualify to save thousands in capital gains tax. Ask Paula a
question and be on the next informative teleconfernce. Sign up right now at
http://www.savegainstax.com
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