Private Annuities

April 13, 2006

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Where a private annuity is used as a business succession tool, the owner sells (transfers) his business to a family member in exchange for a lifetime income.

The value of the business will not be included in his gross estate for tax purposes, provided the value of the annuity equals the value of the exchanged business interest. If the founder dies early, the appreciation in value of his business after the transfer escapes tax. If he lives longer than his life expectancy, the annuity payments will exceed the value of the business.

A drawback of a private annuity is that the seller retains no secured interest in the business. A variation of a private annuity is known as a secured interest note or SCIN, a vehicle where the seller retains a secured interest via a note from a family member. The tax treatment is the same as for a private annuity. The danger here is, if any remaining payments on the note will be forgiven at the founder's death, then any gains from the forgiveness of debt will be taxed in the estate of the founder.