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Wednesday, October 18, 2006

IRS AIMS TO ELIMINATE DEFERRED INCOME TAXES ON PRIVATE ANNUITY TRANSACTIONS

Under existing tax rules, an individual owning property can "sell" such property to a family member or entity owned or controlled by family members in exchange for a private annuity. A private annuity is generally an agreement to pay a fixed sum each year to the seller for a fixed term of years or over the remaining lifetime of the seller.

Such a sale achieves an important estate tax planning benefit, since it can remove an appreciating asset from the future taxable estate of the seller. Thus, estate taxes are avoided on the growth in value of the sold asset that might occur before death (although estate taxes may still be augmented by the seller surviving his or her life expectancy and thus receiving annuity payments in excess of the value of the sold property).

Such planning is facilitated by IRS treatment of the gain arising on such sale. More particularly, such gain can be deferred in part until annuity payments are received. Well, at least that was the case until now.

Under proposed regulations issued October 17, 2006, the IRS is proposing to disallow any deferral of tax on gain from such sales. Instead, if such a sale is undertaken, the seller will both realize and recognize the full amount of gain from the sale in the year of sale. The new provisions will not apply to "charitable gift annuities" under Treas. Regs. § 1.1011-2.

Such regulations, if finalized, would apply to exchanges of property for an annuity contract after October 18, 2006. They would not apply to amounts received after that date under annuity contracts arising from exchanges prior to that date. There also is a limited class of private annuity transactions that would not be subject to the new rules until after April 18, 2007.

Proposed Regulations §§1.72-6 and 1.1001-1.
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