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

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SCOTT HAMILTON, CEO INKNOWVISION, LLC

Private Annuities and SCINs


Goals

Learn basics on techniquesLearn when to consider PAs or SCINs


SCIN Overview

Lifetime transfer of cash or property outright

or in trust in exchange for interest bearing

note

Interest Only

AmortizingProperty

Payments

GrantorTrust


SCIN Overview

At death, note obligation ends.


SCIN - Advantages

Removal of transferred asset and unpaid note balance from

transferor-seller’s estate

Bypasses generation-skipping transfer rules

Cash flow


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 later


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 expectancy


Interest vs. Principal Premium

SCIN Compare.xlsx


SCIN -Tax Treatment

Grantor Trust

No gain or loss recognized on initial sale

No income or deduction recognized on

payments

No change in basis


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 – basis


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 regardless


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 death


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…


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 yearsProperty

Payments

GrantorTrust



Annuity issued by other than insurance carrier



Annuity payments may be level or increasing

1 2 3 4 5 6 7 8 9 100

2

4

6

8

10

12


Private Annuity - Advantages

Removal of transferred asset from client’s

estate

Not a generation-skipping transferCash flow


Private Annuity - Requirements

Transfer is irrevocable


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 independently


Private Annuity -Tax Treatment

Grantor Trust

No gain or loss recognized

No income recognized

No change in basis


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 recovered


Annuity Breakdown Example

$1 MM value

$100,000 tax basis

Seller age 60

4% 7520 rate

$49,605 annuity payments

Tax Treatment of Annuity Payments

45%

47%

8%

Ordinary Income Capital Gain Basis


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 deduction


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

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

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