156
WEALTHCOUNSEL® ESTATE PLANNING STRATEGIES
other deteriorating physical condition, such that there is at least a 50% probability
that the Annuitant will die within one year.
Another advantage of a private annuity is that the Annuitant receives a stream of
payments or cash flow for life. A private annuity may, in effect, provide a means
of generating cash flow from otherwise non-income producing property.
Business Succession Planning
In certain circumstances, the private annuity strategy may also serve as an
effective means of succession planning or exit planning for a closely held business.
e private annuity can be used to transfer business ownership interests, either in
increments or all at the same time, from the owner to junior family members
without gift tax consequences, while providing the owner with a cash flow for life
generated from the cash flow of the business. Given possible immediate income
tax recognition as discussed below, it is advisable to obtain a valuation of the
business interests from a qualified business appraiser. Such an appraisal should
take into consideration various valuation discounts so that the resulting valuation
will be the lowest possible supportable value. To this end it may be possible to
structure the transaction to achieve significant valuation discounts either through
the sale of minority ownership interests, or possibly by contributing the business
ownership interests to a Family Limited Partnership or Limited Liability Company
prior to the sale.
Asset Protection Possibilities
In some states, such as Florida, an annuity is protected from creditors. Florida
Statute 222.14 provides that proceeds from an annuity contract issued to a Florida
resident are not subject to attachment, garnishment, or legal process in favor of
any creditor of the beneficiary of the contract. e Florida courts have broadly
construed this statutory exemption to include both commercial annuities and
privately issued annuities between family members. Further, under Florida law
there is no limitation on the amount of the annuity that may be protected.
erefore, converting individually owned property, which may be subject to the
claims of future creditors, to a private annuity, is a means of asset protection.
Income Tax Consequences
In the past, if appreciated property were exchanged for a private annuity, any capital
gain would be postponed and recognized by the Annuitant over his or her lifetime
as a portion of each annuity payment received. e IRS approved of this result
in Revenue Ruling 69-74. As a result, a private annuity was a particularly useful
strategy to transfer highly appreciated property with a large built-in capital gain and
defer recognition of that gain.
However, on October 18, 2006, the IRS issued Proposed Regulation Sections
1.72-6(e) and 1.1001-1(j) that generally would require gain (or loss) to be
recognized immediately when the property is exchanged for the annuity contract
(unless the property exchanged is cash). When finalized, the Proposed Regulations