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A private annuity trust (PAT) is a capital gains deferral method. It helps in realizing the value of highly appreciated assets such as real estate, without directly selling them and incurring huge amount of taxes from their sale. This program is beneficial to a real estate owner who is not in immediate need of money from the sale of the real estate property.
In a private annuity trust, the owner sells the property to a trust by transferring ownership prior to the actual sale of the property. The proceeds from the sale of the property are then held in the private annuity trust and can be invested by the trustee. Payments can only be made to the owner for the predetermined and agreed amount. Any income the private annuity trust makes is for trust beneficiaries. PAT pays the owner for the asset with a lifetime income stream. PAT allows the taxes due to be extended over the owner’s entire lifetime. There is no interest or penalties for this form of tax deferral. If the trust's earnings are greater than the annuity amounts paid, the excess value will accrue or can be paid out to the ultimate beneficiaries. The owner's heirs who receive any remaining investments in the PAT are exempted from estate taxes after the owner’s death. If the owner dies before living out his/her life expectancy, the trust is entitled to pay a portion of the deferred capital gains taxes.