PRIVATE ANNUITIES AND INSTALLMENT SALES FOR ESTATE PLANNING: AN ANALYTICAL COMPARISON.

Abstract

This study is designed to analyze and compare the private annuity and installment sale transaction from an estate planning perspective. This comparison is to be made in the environment of gifting and other likely assumptions. The research is broken into three separate parts. The first portion is a careful examination of the tax aspects of both transactions. The second portion is the discussion and documentation of the models themselves. The third portion is a discussion of the output, its implications and a comparison of both techniques. The 1976 Tax Reform Act caused definite changes in the areas of estate planning; these changes required planners to look at other techniques to accomplish what had once been done with gifting. This study looks at the private annuity and installment sale transaction in that light. A private annuity is a sale, generally between family members, of property in return for a fixed payment for the remainder of the life of the transferor. An installment sale is now the method used for reporting gain on a sale where the payment extends further than the current tax year. Both of these methods may be used to transfer property prior to death as estate planning techniques. A comparison of both alternatives shows that generally the private annuity is more favorable for a younger transferor or one with a shorter expected life. The installment sale is generally more favorable for an older transferor with a longer expected life. All the planning methods were more favorable than doing nothing and the model shows an optimal point for gifting dependent upon the unified credit. The study shows promise for quantification in the area of taxation. The research would have been impossible if the large data base could not have been generated through use of computer simulation of the transactions. As the technology becomes more available the use of quantification techniques similar to those utilized in this study will increase.