Estates, Gifts & Trusts
Private Annuities and Self-Canceling Installment Notes (805 - 2nd)
Portfolio Description
Tax Management Portfolio, Private Annuities and Self-Canceling Installment Notes, No. 805-2nd, 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 self-canceling installment notes (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 low basis for the property in the transferee's hands and the transferee's inability to deduct any part of the annuity payments as interest. In addition, meeting the annuity payments may impose a substantial economic burden for the transferee. The transferee assumes an investment risk--the risk that the transferred property fails to generate the requisite income to meet the annuity obligation. The transferee also assumes the mortality risk--the risk the transferor will live beyond his or her 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 is 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., Tax Issues of Employee Plan and Commercial Annuities.
This Portfolio may be cited as Wojnaroski, 805-2nd T.M., Private Annuities and Self-Canceling Installment Notes.
Edward P. Wojnaroski, Jr., B.A. Washington & Jefferson College, J.D. University of Pittsburgh School of Law, M.S. (Tax) The American University, Certified Financial Planner; author, Wojnaroski, "Family Owned Business Exclusion," 146 Pittsburgh Legal Journal No. 6 (June 1998),"Tax Aspects of Private Annuities, Part I," 22 Tax Mgmt. Est., Gifts, & Tr. J. 119 (May-June 1997). Featured article: Tax Mgmt. Financial Planning J., Vol. 12, No. 8 (July 19, 1997) "Tax Aspects of Private Annuities, Part II," 22 Tax Mgmt. Est., Gifts, & Tr. J. 120 (July-August 1997). Featured article: Tax Mgmt. Financial Planning J. , Vol. 12, No. 9 (Aug. 19, 1997); Adjunct Professor, Duquesne University's Master of Science in Taxation Program; Member: Duquesne University's Master of Science in Taxation Advisory Board; Member: Pennsylvania, District of Columbia, and Georgia Bars; Member: American, Pennsylvania, and Allegheny County Bar Associations, Council Member; Member: Financial Planning Association; Judge Advocate, United States Marine Corps (1991-1996), United States Marine Corps Reserve (1996-present); Member: U.S. Supreme Court; U.S. Court of Appeals for the Third Circuit; U.S. Court of Federal Claims; U.S. Tax Court; U.S. Court of Appeals for the Armed Forces; U.S. District Court for the Western District of Pennsylvania.
