October 17, 2006--San Diego, California--Exeter 1031 Exchange Services, LLC announced today that the Department of the Treasury issued proposed regulations that significantly restrict the benefits and use of Private Annuity Trusts.
The Department of the Treasury and the Internal Revenue Service have issued proposed regulations that address the income tax treatment of an exchange of highly appreciated property for an annuity contract. According to the IRS the proposal is designed to combat the problem of some taxpayers who have been inappropriately avoiding or deferring income tax consequences on the exchange of highly appreciated property for the issuance of annuity contracts.
The Department of the Treasury and the Internal Revenue Service issued proposed regulations that would address the tax treatment of an exchange of property for an annuity contract. The proposed regulations would apply the same rule to exchanges for both private annuities and commercial annuities.
A decades-old IRS ruling generally postpones tax on the exchange of appreciated property for a private annuity, a result inconsistent with the tax treatment of exchanges for commercial annuities or other kinds of property. This ruling was originally based in part on the assumption that the value of a private annuity contract could not be determined for federal income tax purposes. This assumption is no longer correct.
The Department of the Treasury and the Internal Revenue Service have learned that the ruling has been relied upon inappropriately in a number of transactions that are designed to avoid U.S. income tax. The guidance issued today proposes to declare the ruling obsolete.
Treasury's explanation of the logic behind the new rules is that they no longer believe their prior position to be correct. Revenue Ruling 69-74 has been rescinded by these proposed regulations. It does appear that pre-10/18/2006 transactions which have been properly structured under the old rules will be permitted to stand. The Internal Revenue Service will not recognize future transactions structured as Private Annuity Trusts for income tax deferral purposes.
In general, if adopted, these proposed regulations would be effective for exchanges of property for an annuity contract after October 18, 2006, and for annuity contracts received in such exchanges after October 18, 2006. The effective date is delayed until April 18, 2007 for certain transactions that pose the least likelihood of abuse. Taxpayers interested in this concept may want to consider the Deferred Sales Trust instead.
# # #
We Have Answers. Go Ahead, Ask
Exeter Fiduciary Services, LLC, a wholly-owned subsidiary of The Exeter Group, LLC, is a private fiduciary services company in the business of providing specialty fiduciary and trust related services, including Title Holding Trusts, Deferred Sales Trusts™, Qualified Trust Accounts for 1031 tax deferred exchanges, custody and safekeeping services, as well as serving as trustee under specialized trust arrangements.
Exeter Fiduciary Services, LLC is located in the national corporate headquarters office of The Exeter Group of Companies in San Diego, California. You can contact Exeter Fiduciary Services, LLC at anytime, 24 hours a day, 7 days a week, 365 days a year. Call Exeter 24/7 provides round-the-clock access to our senior trust advisors when you need them.