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1031 Exchange | Private
Annuity Trust | PAT | Charitable Remainder Trust
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A 1031Exchange
is similar to a traditional IRA or 401K retirement plan.
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Private Annuity Trust, Charitable
Remainder Trust
Or 1031 Exchange -TIC:
Which Is Right For You?
By: Paula Straub
I've written a lot about how a PAT or a CRT or a 1031-TIC might
be right for other people, but how do you decide if one is right for
you? There are several things you should think about when trying to
choose between these three options:
1) Are you at a place in your life where you want to accrue assets
or do you want to distribute them?
If you are still trying to accrue assets, you may want to use a 1031
Exchange -TIC vehicle to generate income and save capital gains tax
because you don't lose control of the asset like you do with a PAT or a
CRT. Both a PAT and a CRT allow you to distribute assets out of your
control and out of your estate.
How do you know if you should be trying
to accrue or distribute assets? If it is possible that your assets will
outlive you, then you are probably in a distribution phase of your life.
Let me give an extreme example to clarify.
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I have a friend whose grandfather died at
the age of 85. On his death, the man left the entirety of a $20 million
estate to his 92-year old wife of almost 60 years. The assets of my
friend's grandmother will outlive her. She is in a distribution phase of
her life. It is more complicated than being old with lots of money,
however. |
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As another
example, I know of a widow in her 90s who, though she will be able to
leave some sort of legacy to her family, is not really in a position to
distribute assets. About 15 years ago, when she and her husband where in
their 70s, they had about $2 million in assets. They figured that given
their age and the amount of money they had, they should begin to
distribute their wealth. So they did. They had to cease distributing
assets, however, when the husband died a slow death of cancer in his
early 80s. His healthcare in the last year or so of his life ate up a
big chunk of the estate. As well, after this death, the widow was unable
to care for herself, so moved into an assisted living facility. She has
lived in various such facilities for over 10 years now. She has
significant healthcare costs, but she is not in such poor health -
indeed she has no major diseases - that she won't live another few
years. She has had to use almost all her estate to care for herself. She
is not in a distribution phase of her life.
As you can see, It can sometimes be difficult to figure out where you
are in your financial life, but you should consider your age, health and
family medical history, and the value of all your assets and the
likelihood that they will appreciate or continue to generate income as
you age.
2) What type of asset do you wish to sell?
A 1031-TIC deal will only work with investment real estate. You
can't sell use your own residence or a second home. You can use
commercial or residential rental property. If you're looking to sell
commercial assets or other highly appreciated illiquid assets, a PAT or
CRT may work better for you. As I've mentioned in an earlier post,
securities can be sold through a PAT, but not if they're in a restricted
account like a 401K or an IRA.
3) Do you need income now, or later in retirement?
A 1031-TIC deal generally provides income immediately, but there
are properties such as land deals which allow you the opportunity to
accrue appreciation without taking income. A PAT and a CRT can provide
income immediately, but income from either trust can also be delayed. In
the case of a PAT, your receipt of the income can be delayed until you
are 70 ½ years old.
4) Do you have an estate large enough to be subject to estate tax?
If you have an estate large enough to be subject to estate tax, a PAT or
a CRT may work better for you than a 1031-TIC structure. With the PAT or
the CRT, the asset is, for tax purposes, removed from your estate on
account of you giving up control of it. Since the asset is no longer in
your estate, it is no longer subject to estate tax when you die, even
though, in the case of a PAT, the contents of the trust may pass to your
heirs. They will also receive the assets gift tax, transfer tax and
generation skipping tax free.
Megans Law
5) Do you wish to defer capital gains tax for the rest of your life or
is it acceptable to spread the burden over the rest of your life?
A 1031-TIC structure and a CRT both give you the ability to defer
capital gains tax for the rest of your life. A PAT spreads the tax
burden out over the course of the payments you receive from it.
These are just some of the things you will want to consider when
thinking about your options for deferring capital gains tax.
There are many other things to bear in mind, and I can gladly walk
anyone who's interested through all the options and considerations. |
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1031 Exchange | Private
Annuity Trust | PAT | Charitable Remainder Trust
A
1031 Exchange is similar to a traditional
IRA or 401K retirement plan.
About the Author:
Paula Straub will help you understand the Capital Gains Tax Saving
Strategies you need to keep your capital gains working for you. Get
your free report "Seven Secrets to Help you Hang onto Your Capital
Gains" at
http://www.keepyourcapitalgains.com
Read more articles by:
Paula Straub
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WWW.TIC-1031EXCHANGEFACTS.COM
is not a securities broker dealer and
does not sell securities.
Under no circumstances are the contents of this section or any other section
of this website to be deemed tax or legal advice.
Investors are urged to consult their tax and/or legal advisors before making
an investment in a 1031 Exchange - tenant in common (1031 TIC)
product.
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