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IRS Regs Kill Private Annuities

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  • Vernon K. Jacobs
    On October 18th, the IRS issued proposed regulations (Reg-141901-05) that reverses their long standing position on the deferral of capital gains through the
    Message 1 of 1 , Oct 31, 2006
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      On October 18th, the IRS issued proposed regulations (Reg-141901-05) that reverses their long standing position on the deferral of capital gains through the use of private annuities. The proposed regulations are effective for transactions after October18, 2006.

      These regulations effectively eliminate the use of private annuity trusts and all kinds of foreign private annuity deals.  The effect of the regulation is to treat the transfer of appreciated property in exchange for an annuity as a sale that is taxable at the time of the transaction.  Arrangements involving private annuities that were completed before October 18, 2006 will not be affected by these new regulations. In addition,  according to the proposed regulations;
      "... the effective date is delayed for six months for transactions in which (1) the issuer of the annuity contract is an individual; (ii) the obligations under the annuity contract are not secured, either directly or indirectly; and (iii) the property transferred in the exchange is not subsequently sold or otherwise disposed of by the transferee during the two-year period beginning on the date of the exchange."
      These regulations do not affect the tax treatment of other methods of deferring capital gains taxes such as installment sales, charitable gift annuities and charitable remainder trusts. It appears that the use of self-cancelling installment note will continue to be allowed.

      Customers of Offshore Press who have purchased a copy of our (1) report on Offshore Variable Annuities, (2) our book on Offshore Tax Strategies, (3) our guide to Legal Ways to Save Taxes, (4) our book on Risk Management for Investors,  or (5) a subscription to our online Wealth Preservation Library should note that any references therein to the use of private annuity transactions is now affected by these revised regulations for transactions begun after Oct. 18, 2006.

      We will update and revise these reports and any others in which we have written about the tax treatment of private annuities, but until then, customers should be aware that the rules have changed and that any kind of private annuity arrangement should be avoided or should only be utilized with the advise of a qualified tax professional.

      A copy of the regulation is available at the IRS web site at http://ftp.irs.gov/pub/irs-regs/14190105.pdf  or on our subscribers' web site.

      Vern Jacobs
      Offshore Press, Inc.
      http://www.offshorepress.com 




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