InKnowVision April 2013 HNW Technical PPT - PA and SCINs

Technical Webinar
©2012. InKnowVision LLC. All rights reserved. www.inknowvision.com

S C O T T H A M I L T O N , C E O
I N K N O W V I S I O N , L L C
Private Annuities and SCINs
Copyright InKnowVision, LLC 2012

Goals
 Learn basics on techniques
 Learn 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
 Amortizing
Property
Payments
Grantor
Trust

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

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 years
Property
Payments
Grantor
Trust

 Annuity issued by other than insurance carrier

 Annuity payments may be level or increasing
0
2
4
6
8
10
12
1 2 3 4 5 6 7 8 9 10

Private Annuity - Advantages
 Removal of transferred asset from client’s estate
 Not a generation-skipping transfer
 Cash 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 April 2013 HNW Technical PPT - PA and SCINs

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InKnowVision April 2013 HNW Technical PPT - PA and SCINs