Financial poster

A private annuity differs from a commercial one in two respects. First, ordinary property other than cash, normally real estate, is used to acquire the annuity and, second, the promise to make the payment is made by an individual, often a son or daughter rather than an insurance company. Payments under a private annuity are payable periodically, but they usually cease upon death of the annuitant.
A private annuity can be used if a parent wants to transfer a farm or ranch to a child in exchange for a guaranteed income for life. However, no mortgage or other security (except life insurance in the event of death) may be given to the parent to guarantee payment of the required annual amount. Some parents might consider such an arrangement a serious drawback. In addition, there may be adverse income tax consequences to the child should he sell the real property acquired by the annuity prior to the annuitant’s death. The tax basis becomes the sum of all annuity payments.
Generally, private annuities are discouraged in estate planning; however, there may be exceptions. If a child agrees to pay to the parent a fixed payment for the farm for the rest of the parent’s life and if the parent dies prematurely, the child buying the farm receives a windfall that may make the other children unhappy. On the other hand, if the parent lives longer than a normal life, the child purchasing the farm pays in excess of the property’s value. An insurance company usually is in a financially better position to fund a lifetime annuity than is an individual.
The main advantage of selling the farm for a lifetime annuity is that the farm is not included in the seller’s estate for estate taxes. The main disadvantage to the selling parent is that the buyer’s promise is unsecured and the parent is left with little financial protection if the buyer dies or becomes bankrupt. To enjoy the tax saving features of a private annuity requires that the buyer’s promise must not be secured by seller retaining rights in the property involved. Thus, it is different from a typical installment sale. Each annual payment to the parent is usually comprised of ordinary income, return of capital, and capital gain.
A situation in which the lifetime annuity might be justified is where the parent has several farms, is short of liquid assets, such as cash, is unable to take advantage of the annual gift tax exclusions and all of his children are interested in buying a farm. In this case, if a default occurs, the parent would still have land and income remaining from the other farms. Also, if all children were involved, a charge of favoritism to one child could not be made.
The parties involved in a private annuity should seriously consider all tax ramifications of private annuity transactions. Private annuities often result in liability for income and gift taxes. Check with your attorney and tax accountant for further details on private annuities.

In large estates, with some exceptions, it is usually desirable to avoid joint tenancy with rights of survivorship. Owning property in joint tenancy prevents an individual from using a life estate plan or a marital deduction trust for such specific property. Thus, terminating joint tenancies is a part of the total estate plan for some people. As a result of the unlimited marital deduction, joint tenancies between husband and wife no longer have adverse tax consequences at the death of the first spouse.
A severance of joint tenancy can occur at the election of any co-owner by transferring the interest to another person. This can be done without the approval of the other co-owners; and if such transfer should be made, the transferee thereof becomes a tenant in common with the other co-owners who may remain joint tenants to each other. Survivorship rights would not then apply to the interest transferred but would continue to apply to interests remaining in joint tenancy.