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What is a private annuity trust ?

A private annuity trust (PAT) is a type of capital gains deferral program that aims to help with depreciation recapture costs and high-capital gains. This plan usually benefits owners of residential or commercial real estate who require no immediate funds from property sales. Since highly-appreciated properties involved high taxes, a private annuity trust can help people save money.

When an owner has a private annuity trust, he or she sells the property to a trust, which involves transferring the ownership before the sale of property. In this case, the payment of trustees is in the form of a contract, which is set up for a predetermined number of payments for a pre-calculated amount that should be complete for the rest of the owner’s life.

All annuity payments are calculated using a formula with quantities based on the age of the owner, amount of the sale proceeds and the interest rate based, which the IRS sets. The proceeds from each property sale included in the contract are held in a private annuity trust, which can be invested by the trustees. All payments are made to the owner for the agreed amount.

Instead of being taxed on the lump sum of the sale, the owner is taxed only when annuity payments are received. People usually choose a private annuity trust to aid them for retirement because annuity payments don’t have to start immediately. In addition, owners can take advantage of tax benefits as long as the annuity payments start by age 70.

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