Private Annuity
Trust, Charitable Remainder Trust or 1031-TIC: Which
is right for you?
I’ve written a lot about how a
PAT or a CRT or a 1031-TIC might be right for other
people, but how do you decide if one is right for
you? There are several things you should think about
when trying to choose between these three options:
1)
Are you at a place in your life where you want to
accrue assets or do you want to distribute them?
If you are still trying to
accrue assets, you may want to use a 1031-TIC
vehicle to generate income and save capital gains
tax because you don’t lose control of the asset like
you do with a PAT or a CRT. Both a PAT and a CRT
allow you to distribute assets out of your control
and out of your estate.
How do you know if you should
be trying to accrue or distribute assets? If it is
possible that your assets will outlive you, then you
are probably in a distribution phase of your life.
Let me give an extreme example to clarify. I have a
friend whose grandfather died at the age of 85. On
his death, the man left the entirety of a $20
million estate to his 92-year old wife of almost 60
years. The assets of my friend’s grandmother will
outlive her. She is in a distribution phase of her
life. It is more complicated than being old with
lots of money, however. As another example, I know
of a widow in her 90s who, though she will be able
to leave some sort of legacy to her family, is not
really in a position to distribute assets. About 15
years ago, when she and her husband where in their
70s, they had about $2 million in assets. They
figured that given their age and the amount of money
they had, they should begin to distribute their
wealth. So they did. They had to cease distributing
assets, however, when the husband died a slow death
of cancer in his early 80s. His healthcare in the
last year or so of his life ate up a big chunk of
the estate. As well, after this death, the widow was
unable to care for herself, so moved into an
assisted living facility. She has lived in various
such facilities for over 10 years now. She has
significant healthcare costs, but she is not in such
poor health – indeed she has no major diseases –
that she won’t live another few years. She has had
to use almost all her estate to care for herself.
She is not in a distribution phase of her life.
As you can see, It can
sometimes be difficult to figure out where you are
in your financial life, but you should consider your
age, health and family medical history, and the
value of all your assets and the likelihood that
they will appreciate or continue to generate income
as you age.
2)
What type of asset do you wish to sell?
A 1031-TIC deal will only work
with investment real estate. You can’t sell use your
own residence or a second home. You can use
commercial or residential rental property. If you’re
looking to sell commercial assets or other highly
appreciated illiquid assets, a PAT or CRT may work
better for you. As I’ve mentioned in an earlier
post, securities can be sold through a PAT, but not
if they’re in a restricted account like a 401K or an
IRA.
3)
Do you need income now, or later in retirement?
A 1031-TIC deal generally
provides income immediately, but there are
properties such as land deals which allow you the
opportunity to accrue appreciation without taking
income. A PAT and a CRT can provide income
immediately, but income from either trust can also
be delayed. In the case of a PAT, your receipt of
the income can be delayed until you are 70 ½ years
old.
4)
Do you have an estate large enough to be subject to
estate tax?
If you have an estate large
enough to be subject to estate tax, a PAT or a CRT
may work better for you than a 1031-TIC structure.
With the PAT or the CRT, the asset is, for tax
purposes, removed from your estate on account of you
giving up control of it. Since the asset is no
longer in your estate, it is no longer subject to
estate tax when you die, even though, in the case of
a PAT, the contents of the trust may pass to your
heirs. They will also receive the assets gift tax,
transfer tax and generation skipping tax free.
5)
Do you wish to defer capital gains tax for the rest
of your life or is it acceptable to spread the
burden over the rest of your life?
A 1031-TIC structure and a CRT
both give you the ability to defer capital gains tax
for the rest of your life. A PAT spreads the tax
burden out over the course of the payments you
receive from it.
These are just some of the
things you will want to consider when thinking about
your options for deferring capital gains tax. There
are many other things to bear in mind, and I can
gladly walk anyone who’s interested through all the
options and considerations.
For a free consultation, call
me at 760-917-0858.
Paula Straub
Save Gains Tax
This material is not
intended as an offer or solicitation for the purchase or sale of any
security or other financial instrument. Securities, financial
instruments or strategies mentioned herein may not be suitable for
all investors. Any opinions expressed herein are given in good
faith, are subject to change without notice, and are meant for
informational use only. The information contained on this site does
not constitute advice on tax or legal issues. This material does not
take into account your particular investment objectives, financial
situations or needs and is not intended as a recommendation of
particular securities, financial instruments or strategies to you.
Before acting on any recommendation in this material, you should
consider whether it is suitable for your particular circumstances
and, if necessary, seek professional advice.
