Private Annuities and Self-Canceling Installment Notes (Portfolio 805)

Description

The Bloomberg Tax Portfolio, Private Annuities and Self-Canceling Installment Notes, No. 805, describes the advantages and disadvantages of private annuities and self-canceling installment notes (SCINs). This Portfolio also examines the income, estate, gift, and generation-skipping transfer tax consequences of private annuities and SCINs, with special emphasis on planning opportunities.

A private annuity represents the obligation of an individual or entity that does not engage in the business of issuing annuities to make periodic payments to one or more individuals. The person or entity making the transfer purchases the annuity by transferring money or other property to the transferee, which may be an individual, corporation, trust, foundation, or other entity.

Transferors enjoy a number of advantages with properly structured private annuities, including estate tax savings and a lifetime income stream. Private annuities yield a number of potential disadvantages, particularly to the transferee, such as the transferee’s inability to deduct any part of the annuity payments as interest. In addition, satisfying the annuity payments may impose a substantial economic burden on the transferee. The transferee assumes an investment risk — the risk that the transferred property fails to generate the requisite income to satisfy the annuity obligation. The transferee also assumes the longevity risk — the risk the transferor will live beyond his or her actuarial life expectancy.

The removal of the transferred property from the seller’s gross estate serves as the primary advantage of a SCIN. The seller receives an economic benefit similar to an installment sale but without the adverse estate tax ramifications if the seller dies during the term of the note. The disadvantages to these arrangements include the possible recognition of gain upon the seller’s death, the uncertainty of the income tax effect on the buyer, and the risk of challenge by the IRS. In addition, the periodic payments required of the buyer may be burdensome, though this effect may be mitigated by the buyer’s ability to deduct interest paid under the SCIN.

For a more detailed discussion of the estate taxation of commercial annuities, see 821 T.M., Federal Tax Issues of Employee Plan and Commercial Annuities. For a more detailed discussion of the income tax aspects of installment sales, see 565 T.M. Installment Sales (U.S. Income Series).

This Portfolio may be cited as Wojnaroski, 805 T.M., Private Annuities and Self-Canceling Installment Notes.

Table of Contents

I. Foundation
II. Advantages and Disadvantages of Private Annuities
III. Advantages and Disadvantages of SCINs
IV. Comparison of the Private Annuity with SCINs
V. Estate and Gift Tax Aspects of Private Annuities
VI. Income Tax Consequences of Private Annuities
VII. Tax Aspects of SCINs
VIII. Valuation Tables
IX. Private Annuities and Chapter 14
X. Joint and Survivor Private Annuities
XI. Transactional Planning Opportunities with Private Annuities and SCINs