Today's Wall Street Journal has an article on a proposed ruling that will largely eliminate the tax benefits of a private annuity trust.  The ruling disallows the tax-deferral and instead requires immediate tax payment on the present value of the annuity payments. 

Private annuity trusts are a highly specialized tool that have been over-marketed as a tax strategy to owners of appreciated real estate.   Financial planners love them because the technique involves, to oversimplify, a tax-deferred exchange from real estate to a portfolio of securities.  And, of course, financial planners want to manage that portfolio.

Repositioning investment real estate is a two-part process:  tax-deferral on the property just sold, and reinvestment of the proceeds into a new asset.  In my experience,  clients tend to focus on either one or the other, or often confuse the two parts.  For example, I am often asked if a private annuity trust can invest in real estate.  The client wants to avoid taxes, but prefers another real estate investment.  The more appropriate question is:  if the objective is tax-deferral and reinvestment in real estate, is the private annuity trust the proper tool?

 A private annuity trust is an exit strategy for someone who wants to cash out of real estate, and "exchange" into stocks and bonds.  The tax deferral requires creation of a trust (cost and potential complication), and produces an income stream from the securities portfolio, requiring competent asset management (potential cost and uncertainty).

The investor who prefers a tax-deferred exchange from investment real estate to investment real estate does not want a private annuity trust.  They want a 1031 exchange.  The IRS tax-deferral rules are straightforward, and real estate is a familiar investment vehicle.  The advent of the TIC industry has been a particular boon to investors seeking an estate planning tool that offers a tax-deferred real estate investment without management responsibilities.

A private annuity trust may arguably have a role in the sale of a multi-million dollar personal residence, in which the capital gain far exceeds the $500,000 (for married couples)  personal residence exemption. However, all such strategies are currently on hold until final resolution by the IRS and the Treasury.