Tax deferral structured sale annuity
  
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Ensured Installment Sale™
(Structured Sale) FAQ

Structured Sale FAQ

Q: What is the Structured Sale in basic terms?

A: In basic terms, the Structured Sale annuity is a capital gains deferral vehicle that allows sellers of appreciated assets to receive installment payments guaranteed by a top rated life insurance company. The Structured Sale is not related to the Private Annuity Trust in any way.

 

Q: What type of annuity is used in the Structured Sale?

A: The annuity used is designed specifically by the life insurance companies who offer the strategy to defer capital gains taxes. The annuity is technically a fixed immediate single premium annuity that can be customized to fit the income stream needs of the seller.

While the term "immediate" is used to describe the Structured Sale annuity in general terms, the annuity does allow sellers to defer receiving their first payments for a period of years if they choose (up to 20).

 

Q: How will I be taxed when I receive the payments from this annuity strategy?

A: Simple, the income generated by the Structured Sale (Ensured Installment Sale™) is taxed as installment sale income. You only pay the capital gains tax in the year(s) you receive the payments, which allows you to earn a return on the tax funds prior to paying to Uncle Sam.

Every installment payment has a portion of capital gain, interest income, and return of cost basis. Of course the capital gain portion is taxed accordingly, interest income portion at your normal income tax rate, and cost basis is returned un-taxed.

Consult with your tax professional for specific information on your tax consequences.

 

Q: Why is the Structured Sale a good choice for sellers?

A: Unlike many advisors, we'll be up front with you and tell you that this strategy is not a one size fits all solution. Each sellers situation differs greatly... and those differences call for different approaches.

It is a good choice for sellers because it allows you to protect a portion of your retirement income and ensure that you can count on it. It is guaranteed and backed by a Fortune 100 life insurance company. How much more safe can you get?

Below are a few reasons why sellers may consider using the Structured Sale annuity:

  • Guaranteed payments and rate of return
  • Allows you to create a solid base income that you can count on
  • Deferral of capital gains taxes in a simple-straightforward manner
  • Can be very low cost to implement
  • Allows you to "take your chips off of the table" and set aside an income stream for retirement that you know will be there when you need it

There are many other benefits for sellers, but the main benefits are the fact that your investment is guaranteed and you do not have to worry about how the stock market is doing. It's peace of mind.

 

Q: I haven't heard of it... so it must not work... right?

A: Wrong. Just like in any industry there are strategies and methods that are known by all... and ones that are more advanced and known to the experts in the field.

In the tax planning industry the 1031 exchange and installment sale are the staple capital gains deferral methods that are now commonplace. However, these strategies do not fit the needs of all sellers.

More advanced strategies have been created and proven over the years that help sellers solve their capital gains tax issues in more complex.. but often more powerful ways. The Structured Sale, NIMCRUT, UPREIT, DST, Family Installment Sale, and others... are strategies that take a more advanced approach at helping sellers solve their tax and estate planning problems. Because of the advanced nature of the strategies, they tend not to hit the main stream planning world as soon.

* If you have questions about other strategies, please give us a call anytime at 800-666-5584 and we can help you to understand the strategies and to determine which ones make the most sense for your situation.

 

Q: I notice the internal rate of return is relatively conservative... why should I go with the Structured Sale when I have seen returns for other strategies of 6% or more?

A: Yes, the returns on the Structured Sale annuities are conservative; however, you must remember that this is a guaranteed product. The Structured Sale enables you as a seller to conserve your wealth and create a guaranteed stream of tax deferred income you can count on.

Even if the stock market, real estate, interest rates, etc. all crash... your Structured Sale income stream and return are guaranteed by the annuity issuer to stay the same. This is true peace of mind and wealth preservation.

Would you rather hope that your retirement income will be there when you need it... or would you rather KNOW that it will be there?

Yes, there are investments out there that do earn 6% or more. However, these investments do have greater risk than a Structured Sale and are not guaranteed. Remember, as a rule of thumb, the higher the return the greater risk. For a guaranteed pre-tax return, the Structured Sale is very difficult to beat.

 

Q: Why may it be better for me to use the Structured Sale annuity rather than simply pay the tax and be done with it?

A: Truly, this is a question that we cannot answer for you. Your decision should always be based on your goals and hard numbers, with emotion and opinions cast aside for this decision.

A few reasons why sellers often come out ahead using the Structured Sale rather than simply paying the tax right away are:

  • Structured Sale allows pre-tax growth of principal
  • Structured Sale is a guaranteed product. If you are looking for safety, security, and predictability with this portion of your sale... the Structured Sale will help you do that.
  • When looking from a cashflow standpoint, the Structured Sale typically beats out after tax returns of 8% - 10%. If you are looking for the income stream, you will typically have to earn a consistent 8% - 10% on your after tax dollars to match the income stream generated by the Structured Sale.

    Do you know of a guaranteed investment that has a return of 8% - 10%? You will be hard pressed to find one.
  • Structured Sale can create a base of guaranteed income for retirement. This gives you peace of mind that the income will always be there.
  • If you simply pay the tax and "be done with it", you truly are not "done with it". Now you must find suitable investments that earn a 8% + return that you can feel comfortable placing your retirement savings into. After the funds are invested, then you of course must monitor the investment to make sure it is still earning a positive return. The Structured Sale is a set and forget strategy and requires no monitoring, no ongoing fees, etc.

 

Q: Is this simply a tax loophole that the IRS has not yet closed?

A: The IRS works differently from what most people believe. Most people believe that the IRS must officially approve a strategy prior to it being valid.

This is untrue. In fact, virtually all of the capital gains deferral strategies available to sellers today were created and implemented for years prior to the IRS ever even officially commenting on them. The 1031 exchange included.

In 1969, the IRS determined that certain transactions would qualify for special tax treatment. Since then, the IRS has attempted to reduce the opportunities to abuse these types of transactions but has never suggested eliminating the Structured Sale nor installment sales.

 

Q: So, what would happen if the IRS were to rule against the Structured Sale and close this loophole?

A: When United States tax laws are changed, the IRS very rarely make them retroactive. It has been the history of the IRS upon making changes in the tax law to not affect pre-existing transactions. So, if the IRS does make a tax law change, it will most likely not affect pre-existing Structured Sale transactions.

*Note the recent proposed ruling on the Private Annuity in 10/2006. All transactions closed prior to 10/18/2006 are not effected. The tax law change only pertains transactions after the effective date.

 

Q: Who are these 3rd party assignment companies?

A: Very good question. These 3rd party assignment companies are actual companies whose sole purpose is to assist in structured annuity transactions.

Each annuity issuer is affiliated with their own assignment company and they hold partial ownership in the company.

Life insurance companies have been using assignment companies in their structured annuity transactions for 20+ years and have a long track record of success.

The purpose of the the assignment company in the Structured Sale transaction is to act as the purchaser and owner of the guaranteed annuity contract. This is required to ensure the seller does not trigger the constructive receipt or economic benefit doctrines. In addition, the assignment company provides a layer of protection for both the buyer and seller because of its close affiliation with the large life insurance company it works with.

These assignment companies are located in the country of Barbados as approved and protected by the IRS and United States Government in the U.S. - Barbados Tax Treaty - Article 18. This treaty specifically permits the transmission of annuity premiums to the country of Barbados on a tax free basis.

 

Q: Why are the assignment companies located in the country of Barbados?

A: First off, most people are alarmed simply when reading the name "Barbados". To the untrained eye this is alarming because of the abusive tax shelters used in the past 15 years that utilized countries such as Barbados.

For one, the Structured Sale is not a tax shelter. Two, it is not the country of Barbados that should be labeled with this negative connotation. The abusive tax shelters used to avoid taxes all together have abused the tax relationship that the U.S. and Barbados have formed and given the country a bad name.

These assignment companies are located in the country of Barbados for one reason. To ensure that 100% of the annuity premium funds are actually used to purchase the annuity.

For instance, if these assignment companies were located on the U.S. mainland, the premium funds sent to the assignment company for the purchase of the guaranteed annuity would be taxed by the IRS as income for the assignment company.

As you can imagine, the assignment company cannot pay this tax out of their own pocket, nor do you as the seller want an immediate 35-40% reduction in the amount used to purchase the annuity to fund your installment payments.

So, the top rated life insurance companies located their assignment companies in Barbados to take advantage of the U.S. - Barbados Tax Treaty: Article 18, which specifically allows annuity premium funds to be sent to the country of Barbados free of any U.S. income tax. This ensures that 100% of the funds are then used to purchase the guaranteed annuity.

This is yet another advanced tax loophole that most professional advisors are unaware of, but the large life insurance companies have utilized to benefit the sellers in these transactions.

As mentioned earlier, the large life insurance companies offering the Structured Sale annuity have been utilizing their assignment companies in Barbados for years... fully following IRS guidelines.

 

Q: Do I have to place 100% of the funds from the sale into the Structured Sale?

A: Absolutely not. You can place as much or as little into the annuity as you wish. In fact, many sellers wish to use several strategies to help them reach their goals better, which we advise.

For instance, you have $1,000,000 due to you after the sale... $750,000 of which is capital gain.

You want to have a bit of income that you can use as your base income during retirement. Of course, you need to be able to count on this income being there each month... so you do not want to risk it at all.

So, you decide to place $500,000 into the Structured Sale annuity to pay you a guaranteed and fixed income for the next 20 years. Now you have security that you will have a solid and fixed income for the next 20 years.

With the other $500,000, you decide to pay the capital gains tax and invest the remaining funds in some higher yield stocks to hopefully earn a higher return and provide for better liquidity.

Truly, you can customize the Structured Sale in virtually any way you choose and utilize it for as little or as much of your overall strategy as you want.

 

Q: Who is the Structured Sale annuity perfect for?

A: The perfect candidate for the Structured Sale annuity is a seller who:

  • Is looking for deferring capital gains tax and securing a guaranteed income stream for a certain period of years.

This strategy can plan a very important role in your overall strategy by providing you with a guaranteed tax deferred income to help you gain security in your retirement.

 

Q: Who owns the annuity contract?

A: The annuity contract is actually owned by the 3rd party assignment company, which is partially owned by the large life insurance company.

The reason for this is so the seller can avoid triggering constructive receipt and the economic benefit doctrine. As you know, if the seller ever has access or control over the funds, those two doctrines are triggered and the deferral of capital gains is no longer an option. The IRS has ruled many times that even the ownership of an annuity contract can be considered an economic benefit of the owner is the same... or related to the beneficiary of the payments.

While the 3rd party assignment company does own the contract, you as the seller are the sole and irrevocable beneficiary of 100% of the payments. This cannot be changed without the written consent from the beneficiary (you), so you are protected immensely.

 

Q: Can the seller withdraw from the annuity whenever they please?

A: Yes and no. These annuities are set up to protect the seller from triggering the constructive receipt and economic benefit doctrines. For that reason, the seller cannot direct what is to happen with the annuity. They are the sole and irrevocable beneficiary, but have no rights of ownership.

Once the annuity is set in place, the income stream cannot be changed as protection to the seller.

However, the Structured Sale annuity is extremely flexible and allows the seller to receive an income stream with virtually any terms they wish as long as those terms are outlined in the annuity contract. It is very important for the seller to determine what their needs are, and design the income stream around those needs knowing that the stream is locked in.

 

Q: Can the seller cash out the annuity if an emergency should happen down the road?

A: Insurance companies realize that from time to time there are emergencies that cause the beneficiaries to be in financial hardship. For this reason insurance companies often will honor a request to accelerate the benefits when there is a true financial hardship.

In cases where there is not a financial hardship and the insurance company deems the situation as not being a "financial hardship", there are other options to cash in the annuity for a discount. We advise our clients to plan ahead and be sure that they see the Structured Sale annuity as an income stream, rather than a cash account or asset.

It is important to note that when payments are accelerated, capital gains are realized and are then owed.

 

Q: What happens to the annuity income stream if I die?

A: If the beneficiary or beneficiaries (if joint) are to pass on before the annuity contract is fulfilled, the payments continue un-interrupted to the estate of the beneficiary until the contract is fulfilled.

 

Q: One the Structured Sale annuity is set in place, can I add more money to it in the future?

A: The Structured Sale annuity is a single premium annuity, which means that it is paid up with one initial premium payment.

To follow the IRS installment sale guidelines, sellers cannot add more funds to the annuity because it would then be considered an investment rather than an installment note.

Additional annuities can be purchase and put in place in the future under certain circumstances.

For instance, you and your buyer agree on installment sale terms of lump sum payments of $300,000 every year for 5 years and you wish to defer all of the capital gains with the Structured Sale.

To solve this we will simply direct each $300,000 installment payment for the 5 years to purchase a new Structured Sale annuity with the payment terms agreed upon between you and your buyer.

So, you are now able to defer all of your tax... and provide your buyer with better terms. A win-win situation.

 

Q: Is there a limit to the amount that can be placed into the Structured Sale annuity?

A: There are certain limits, however, they only affect a small percentage of sellers.

Each annuity issuer has their own terms. The lowest amount that can be placed into the Structured Sales annuity is $100,000.

As far as maximums, it is well up into the tens of millions; however, because of certain IRS rules we advise our clients on an upper limit of $5,000,000.

The reason for the suggested effective maximum of $5,000,000 is the special interest rule the IRS places on capital gains deferrals of over $5,000,000. Any deferrals over the $5,000,000 mark are subject to a tax on every dollar over that mark.

To this date, the largest Structured Sale annuity is around $8,000,000 as far as we are aware.


 

 

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