Private annuity not subject to OID provisions.

• Author: O'Driscoll, David
• Position: Original issue discount

R is an individual who owns a real estate investment organization; it provides a full range of services, including acquisitions, planning, development leasing and property and project management.

R proposes to transfer his interest in partnership P to Trust E in exchange for a private annuity that will provide fixed annual payments for his life. R's grandchildren are E's beneficiaries. E's assets consist of publicly traded stocks and real estate holdings; its only liability is a note. P owns a percentage of outstanding stock in a company that owns interests in entities that own real estate.

Pursuant to the agreement, R will irrevocably transfer his interest in P to E for E's obligation to pay R an annual annuity on 60 days' demand. The annuity payment amount will be calculated under applicable IRS tables to equal the value of the interest in P on the transfer date. Also, the annuity payments will terminate with the last payment immediately preceding R's death, or at R's death if no payments were made before that. E's obligation will not be secured by any of its assets and it will not establish any security or any fixed or other specific chargeable source for the annuity payment. However, the trustee is authorized to invade or dispose of E's principal to meet the annuity obligations.

Annuity vs. Debt Instrument

An annuity is a periodic amount paid at a regular interval under a contract that provides a determinable amount of payments in consideration for a fixed sum or transfer of property; see Regs. Sec. 1.72-2. A private annuity is an arrangement under which an individual or entity promises to make periodic payments to the transferor for the transferor's remaining life.

For purposes of the original issue discount (OLD) provisions, "debt instrument" does not include any annuity contract to which Sec. 72 applies which depends (in whole or in substantial part) on the life expectancy of one or more individuals; see Sec. 1275(a)(1)(B)...