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March 01, 2007 at 02:00 AM
Were private annuity trusts (PATs), popular tools for estate planning in retirement, just a flash in the pan, now that the Internal Revenue Service (IRS) is set to rule on their validity?
Yes, say most retirement professionals, and as they’ve come under the IRS’s microscope, many advisors also say that PATs were actually not so kosher to begin with. It will not be surprising, they say, if these vehicles are no longer used for estate planning at all following a planned February 16 ruling by the IRS.
“I have always thought that PATs were too aggressive, and basically marketed as a way to tell people they could avoid paying taxes,” says David Hayes, a CFP in Mount Juliet, Tennessee.
The PAT had gained popularity in the past couple of years as it allowed individuals to defer capital gains taxes on the sale of highly appreciable assets–namely real estate–while receiving a regular income stream. The concept of the PAT was quite cutting edge, says Tere D’Amato, director of advanced planning and wealth management at Commonwealth Financial Network in Waltham, Massachusetts. It blended two concepts, the private annuity and the trust, but “anytime you take two concepts and take the tax law that one or the other is based on, it may or may not be accepted by the IRS,” she says.
PATs were always a bit fuzzy and loosely structured, advisors like Hayes believe, and their popularity was due mostly to the work of clever attorneys and real estate organizations, who convinced people that they could transfer their assets into a trust and, well, avoid paying taxes on the assets.
The IRS caught up, though, and last October issued a proposed rule that would basically tax the person transferring a real estate asset into a private annuity trust in the same way he or she would have been taxed if that property was sold for cash and the cash used to purchase the annuity. That means the tax rules for PATs would be the same as those applied to commercial annuities, thereby removing any advantages.
As such, PATs are no longer a viable tool for those seeking to do estate planning, says I. Jay Safier, CPA and principal at New York-based accounting and consultancy firm RSSM & Company. Organizations like the Irvine, California-based National Association of Private Annuity Trusts (NAPAT) have not been recommending them since the IRS proposal was issued.
