Private annuity transactions shut down.

• Author: Sherr, Eileen

Private annuities (and private annuity trusts), with their controversial, claimed deferred-or-avoided tax treatment, have been proliferating in various parts of the country over the past few years, especially in high-end real estate markets. The IRS is now putting an end to such preferential treatment.

The Service recently issued proposed regulations (REG-141901-05, 10/18/06) and IR 2006-161, generally effective for transactions completed after Oct. 17, 2006. The new rules apply the same tax treatment to exchanges of real estate or other appreciated property for an annuity, regardless of whether private, commercial or secured. Estate planners and others using private annuities will now (or, as discussed below, starting in six months) have to calculate the tax on the annuity's fair market value and recognize gain at the time of the exchange (similar to selling the asset outright, but without the cash to pay the tax).

The new guidance declares obsolete Rev. Rul. 69-74, which some taxpayers had (inappropriately, according to Treasury) relied on to defer or avoid tax. Charitable gift annuities are not affected by the proposed guidance. Because many legitimate estate planning (and closely held business-succession-planning) transactions may be in process (and are done for nontax reasons), the effective date is postponed for six months (until April 17, 2006) for...