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CLIENT ALERT:  PRIVATE ANNUITY TRUSTS

The U.S. Treasury Department issued proposed regulation (REG 141901-05) on October 18, 2006 which reverses the Treasury and IRS position on private annuities. The proposed regulation would require capital gain taxes resulting from the sale of an appreciated asset to be recognized in the current tax year, rather than allowing the recognition of capital gains taxes to be deferred over the life of the annuitant. This effectively eliminates the benefit of capital gains deferral in a Private Annuity Trust.

The effective date for this proposed regulation is October 18, 2006. As such, any Private Annuity Trust that has not been funded by this date will not be able to defer their capital gains upon the sale of the appreciated Trust asset.

Please note that any existing Private Annuity Trusts that have been completed prior to October 18, 2006 will not be subject to this proposed regulation. These Private Annuity Trusts are still valid and the deferral of capital gains is still permitted. However, this does not alleviate potential IRS scrutiny in the future. If you have not established and funded a Private Annuity Trust by October 18, 2006, you will no longer be able to do so.

Please also note that while Private Annuity Trusts are no longer a viable means to defer capital gains taxes, the proposed regulations did not affect other means of advanced estate planning, such as Charitable Remainder Trusts, Charitable Gift Annuities, installment sales and 1031 exchanges. These tools are still available options for your estate planning needs and may serve as an alternative to a Private Annuity Trust.

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