Annuitization

Annuitization is the process of taking an asset and, by way of an installment sale or annuity sale, effectively converting the asset into a stream of payments.

Annuities are financial products or private contracts that periodically pay the annuitant (sometimes “obligee”) a specific payment for a fixed period of time, or until the annuitant’s death. The typical use is that the annuitant is gives up some amount of money now, by purchasing the annuity, in exchange for retirement payments. Usually, annuities are sold by insurance companies, but they can be privately arranged also. Indeed, the Internal Revenue Code has specific provisions for a “Private Annuity”. In either case, the seller of the annuity (the “obligor”) is usually betting that the annuitant will die before the annuitant gets his money back, and that the seller can make money on the amount paid by the annuitant, until the payments are made back to the annuitant.

Annuities can be great asset protection tools. There are primarily three reasons for this:

• Many states protect annuity contract and payments made by the annuity from creditors

• Even in the states that allow creditors to garnish the annuity payments, the creditor must do this monthly and does not get a big pile of cash all at once.

• The creditor must risk the death of the annuitant, which stops the payments.

All of these factors militate in favor of a settlement with a creditor, who would normally rather have a small amount of money now than risk either not collecting anything at all or to expend the time and cost to garnish the small annuity payments every month.

Private Annuities

Private Annuity arrangements are very attractive to wealthy people. These are arrangements that are made with a private obligor, i.e., the obligor cannot by definition be in the business of issuing annuity contracts. In addition to the asset protection benefits mentioned above, private annuities have a tremendous potential tax benefit, namely, that if appreciated assets are used to fund the annuity contract, the annuitant pays no capital gains on the transfer and the seller of the annuity gets what amounts to a “step-up” in the basis of the annuity (consult with a licensed tax attorney to learn more). For these reasons, private annuities are an excellent vehicle for making transfers of property for asset protection and tax reasons.

A Private Annuity Primer, contributed by tax attorney Joseph Petrucelli, LLM, discusses the basic tax treatment of private annuities.

Stupid Private Annuity Tricks -- A list of common mistakes made in private annuity planning, by Joseph Petrucelli, JD, LLM

Private Annuity Terms

• Deferred Private Annuity (DPA)
  A Private Annuity arrangement that is deferred until the Obligee reaches some age, usually around 70. From the asset protection viewpoint, the hoped-for advantage is that the creditor will not be able to garnish payments until the deferral period ceases and the annuity payments begin.

• International Private Annuity Contract (IPAC)
  A form of private annuity arrangement where the obligor to whom assets are sold and who will make the annuity payments is a foreign party domiciled in a tax and debtor haven jurisdiction.

• Private Annuity
  A method of selling an asset whereby the seller (obligee) sells the asset to the buyer (obligor) in exchange for the buyer agreeing to make certain payments to the seller until the seller dies. To qualify as a Private Annuity for U.S. tax purposes, in addition to other requirements, the buyer (obligor) must not be in the business of issuing annuities.

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This material contains only general descriptions and is not a solicitation to sell any insurance product or security, nor is it intended as any financial or tax advice. Consult your financial or tax advisor for specific questions. For information about your specific insurance needs or situation, contact your insurance agent. Before investing, understand that variable annuities, mutual funds and variable life insurance products are subject to market risk, including possible loss of principle. All individuals selling variable annuities and variable life insurance products must be licensed insurance agents and registered representatives. Variable life products allow the contract holder to choose and appropriate amount of life insurance protection that has an additional cost associated with it. Our articles are intended to assist in educating you about insurance generally, but they cannot provide personal advice. They may not take into account your personal characteristics, such as budget, assets, risk tolerance, family situation or activities, etc. which may affect the type and amount of insurance that would be right for you. In addition, state insurance laws and insurance company underwriting rules may affect available coverage and it costs. If you need more information or would like personal advice, you should contact an insurance professional.

You may also visit http://www.nasd.com and http://www.sec.gov and the websites of your state’s insurance department and securities department for more information.

Investor Alerts Regarding Annuities

Private Annuity Trust
The Numbers Don't Support the Hype. by Kevin J. McGrath

Melnik v. Commissioner of the IRS
Stock sale to foreign corporation lacked economic substance; no penalty.