A Private Annuity presents some similar characteristics to the Installment Method previously described. However, before we proceed a word of CAUTION is advised. This Private Annuity is NOT to be confused with a commercial annuity purchased from an Insurance company. The Private Annuity described here is purchased from a private third party and not a financial institution. So what then is a Private Annuity?
It involves the SALE of property in exchange for a promise to pay income for the rest of the sellers life. The seller transfers complete ownership of property to the purchaser (other third party). This purchaser then promises to pay to the seller a set amount of payments to the seller over a specified period of time.
Generally there are two sets of payment provisions. The first form covers payments to ONE LIFE, commonly referred to as a Single Life Annuity. In addition, you could draft the agreement to cover two lives and this is called a Joint and Survivor Annuity.
This form of Buy-Sell funding is frequently used in the sale of appreciated propety. To be more specific, the property is usually an appreciated business.. The transaction is most likely between a parent (owner of the business) and his/her children.
Private Annuities can be very useful in Estate Planning as it often involves freezing the future growth of a business by removing it from the business owner’s estate. In fact, later in our articles we will be dealing with Estate Planning issues involving Business Succession. The two actually go hand in hand. So stay tuned. Next we will discuss some tax features of the Private Annuity which touch on estate planning.