A longtime client comes to you one afternoon with a predicament — they have owned an apartment building for 10 years and are getting ready to retire. They don’t, however, want to deal with the headaches involved with managing a property, yet they also don’t want to be stuck with a bill for capital gains taxes. What they are looking for, essentially, is:
- The ability to defer their capital gains tax
- A safe and secure income stream
- A low to no-maintenance solution
In the past, a financial advisor or agent would probably direct them toward a 1031 exchange or installment sale, or advise them to simply pay the tax. While these strategies are all valid, though, they could not help this client reach their goals and often to not net commissions once these older strategies are enacted.
In 2005, however, an alternative solution appeared on the marketplace: a structured sale annuity, which allows clients who are selling appreciated assets to safely defer their capital gains taxes while providing them with a guaranteed income stream.
How does a structured sale annuity work?
While these annuities have been used for 30-plus years in the structured settlement industry, they are just now coming into the realm of appreciated assets.
In essence, structured annuities are:
- Traditionally fixed single premium annuities.
- Usually owned with a third-party company, partially owned by the annuity issuer, and 100 percent guaranteed by the issuer (the ownership by a third party is necessary to avoid a constructive receipt for the beneficiary.
- Products where the beneficiary is not taxed on the funds until payments are received – and in some cases, they are exempt from state and federal income taxes.
Generally, the structured sale annuity allows the seller of highly appreciated assets (such as closely held businesses or homes) to defer their capital gains taxes over whatever timeframe they select and receive a guaranteed stream of income backed by the financial strength of the issuer. Buyers who implement this strategy are not at risk of defaulting, either, as they are with traditional installment sales.