Private annuity trusts blown out of the water by IRS

While not a pure settlement issue, I was struck by the fact that yesterdays announcement of a crack down on Private Annuity trusts followed about three days after my posting on the topic over at the Wahlstrom & Associates blog. Coincidence, or is the IRS just that impressed with my logic? In that posting, I was discussing the risk of engaging in any tax strategy that is sound on it's face, but has been hijacked by the financial and tax planning sales community and is the "tax shelter de-j our" as was the case with Private Annuity Trusts over the last couple of years.

The article was a compare and contrast of the difference in risk between a private annuity trust, and the new, but poorly marketed, structured real estate sale annuity that Allstate rolled out last year. In my commentary I mentioned the likelihood of the IRS cracking down on the mini-industry that had sprung up on private annuity trusts, and that the tax foundation was shaky. Well, I'd like to think I was a genius, but the timing was simply fortunate, however I think that the decision by the IRS was inevitable.

What the IRS did yesterday was propose regulations, effective immediately, that essentially would end the capital gains tax deferral for these deals. Instead, the seller of the property that is placed in the private annuity trust would be taxed on the full, fair market value of the annuity at the time of the exchange. This would effectively drive the sellers total capital gain into that tax year, and not allow for the deferral over a period of time. The changes were a direct result of the IRS and Treasury wanting to end the abusive deals that were proliferating all over the country as Private Annuity Trust sales organizations did seminars, mailings and online click through ads to bring people into their trust deals.

The IRS and Treasury did make a very important statement, and this is the point I want to drive home. Installment sales are still permissible and will now become the back bone of tax deferral strategy for people selling real property. This means that the Allstate structured sale product is the ONLY vehicle that a conservative investor looking for tax deferral has available to spread gain over several years. If you want to learn more about the Allstate Structured sale annuity that allows for installment sales of real property, click over to Wahlstrom & Associates and read up on the material I have there.  

In the words of national tax expert Stephan Leimberg, "private annuity trusts are kaput because nobody wants to pay a tax upfront." I totally agree and for now at least, the market has tipped in favor of structured sale annuities using an installment sale, and the tidal wave should start to crash over that product shortly. I sure hope the ladies and gentleman at Allstate are staffed up and ready for what is about to come.  

Posted on October 19, 2006 .