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InKnowVision HNW Technical Webinar - Private Annuity and Self Canceling Installment Notes

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In this session we will be looking at two actuarially-based estate planning solutions that can be very powerful in the right situations.

Both of these solutions depend on careful analysis of life expectancy. We will be looking at the advantages of using actuarial firms to develop life expectancy profiles and show you how InKnowVision has used those profiles to help deliver superior results to our high net worth clients.

Learn more at www.inknowvision.com

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InKnowVision HNW Technical Webinar - Private Annuity and Self Canceling Installment Notes

  1. 1. Technical Webinar©2012. InKnowVision LLC. All rights reserved. www.inknowvision.com
  2. 2. Private Annuities and SCINs SCOTT HAMILTON, CEO INKNOWVISION, LLCCopyright InKnowVision, LLC 2012
  3. 3. Goals Learn basics on techniques Learn when to consider PAs or SCINsCopyright InKnowVision, LLC 2012
  4. 4. SCIN Overview Lifetime transfer of cash or property outright or in trust in exchange for interest bearing note  Interest Only  Amortizing Property Grantor Trust PaymentsCopyright InKnowVision, LLC 2012
  5. 5. SCIN Overview At death, note obligation ends.Copyright InKnowVision, LLC 2012
  6. 6. SCIN - Advantages Removal of transferred asset and unpaid note balance from transferor- seller’s estate Bypasses generation-skipping transfer rules Cash flowCopyright InKnowVision, LLC 2012
  7. 7. SCIN - Requirements Transfer is irrevocable – sort of? Installment sale tax treatment is automatic if any payments are made after the year of sale (Non-grantor trust)  election to opt out if desired Installment treatment is not for sales of marketable securities –  use entity Sales to related parties are generally subject to 2-year third-party resale restrictions – discussed laterCopyright InKnowVision, LLC 2012
  8. 8. SCIN - Requirements Consideration for transferred property must take into account mortality risk associated with seller’s death while note is outstanding  Interest Premium  Principal Premium  A combination Note term must be less than seller’s life expectancyCopyright InKnowVision, LLC 2012
  9. 9. Interest vs. Principal Premium SCIN Compare.xlsxCopyright InKnowVision, LLC 2012
  10. 10. SCIN -Tax TreatmentGrantor Trust No gain or loss recognized on initial sale No income or deduction recognized on payments No change in basisCopyright InKnowVision, LLC 2012
  11. 11. SCIN -Tax Treatment Non-Grantor or Individual buyer  Seller’s adjusted tax basis is recovered over life expectancy  Gain is recognized by seller ratably over the applicable life expectancy  Gain = Present value of SCIN – basisCopyright InKnowVision, LLC 2012
  12. 12. Two Year Resale Rule If property sold for SCIN is sold to related party, resale within 2 years triggers gain to original seller If sold after, no gain recognized by original seller If grantor trust, gain recognized regardlessCopyright InKnowVision, LLC 2012
  13. 13. Gift and Estate Tax No gift tax if FMV of note payments = FMV of property sold Effective for estate freeze Zero estate inclusion with note since no payments are made to seller after deathCopyright InKnowVision, LLC 2012
  14. 14. When Would You Consider Appreciating estate with significant tax exposure Lifetime transfer of closely held business to family members or key employees Shorter than normal life expectancy  LE Reports  SCINS/PAs/Life Insurance/Premium Finance…Copyright InKnowVision, LLC 2012
  15. 15. Private Annuity Overview Lifetime transfer of cash or property outright or in trust in exchange for annuity payable over  Seller’s life (or joint life with another individual)  Shorter of (a) or a fixed term of years Property Grantor Trust PaymentsCopyright InKnowVision, LLC 2012
  16. 16. Private Annuity Overview Annuity issued by other than insurance carrierCopyright InKnowVision, LLC 2012
  17. 17. Private Annuity Overview Annuity payments may be level or increasing 12 10 8 6 4 2 0 1 2 3 4 5 6 7 8 9 10Copyright InKnowVision, LLC 2012
  18. 18. Private Annuity - Advantages Removal of transferred asset from client’s estate Not a generation-skipping transfer Cash flowCopyright InKnowVision, LLC 2012
  19. 19. Private Annuity - Requirements Transfer is irrevocableCopyright InKnowVision, LLC 2012
  20. 20. Private Annuity - Requirements Annuity payments cannot be secured or tied to income produced by transferred property  Securing the payments in any way causes immediate gain recognition for tax purposes  Tying annuity payments to transferred property’s income may result in inclusion in seller’s estate  Therefore, the buyer should possess wherewithal to satisfy annuity obligation independentlyCopyright InKnowVision, LLC 2012
  21. 21. Private Annuity -Tax TreatmentGrantor Trust No gain or loss recognized No income recognized No change in basisCopyright InKnowVision, LLC 2012
  22. 22. Private Annuity -Tax Treatment Non-Grantor or Individual buyer  Seller’s adjusted tax basis is recovered over life expectancy  Gain is recognized by seller ratably over the applicable life expectancy  Gain = Present value of annuity – basis  Immediate gain recognition if annuity payments are secured  Ordinary income once basis is fully recoveredCopyright InKnowVision, LLC 2012
  23. 23. Annuity Breakdown Example $1 MM value Tax Treatment of Annuity Payments $100,000 tax basis 8% Seller age 60 4% 7520 rate 45% $49,605 annuity payments 47% Ordinary Income Capital Gain BasisCopyright InKnowVision, LLC 2012
  24. 24. Gift and Estate Tax No gift tax if PV of annuity = FMV of property Effective for estate freeze Zero estate inclusion with single life annuity since no future payments are made to seller If joint & survivor annuity  Seller’s estate includes PV of survivor’s payments  If survivor is seller’s spouse, no federal estate tax due to unlimited estate tax marital deductionCopyright InKnowVision, LLC 2012
  25. 25. When Would You Consider Appreciating estate with significant tax exposure Lifetime transfer of closely held business to family members or key employees Shorter than normal life expectancyCopyright InKnowVision, LLC 2012

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