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 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.

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