Does a private annuity have a place in your estate plan?

When James met with his advisor to review his estate plan, he realized that his overall estate might be worth more than the current $5.43 million gift and estate tax exemption amount. In fact, his estate includes a family business, real estate holdings and a sizable investment portfolio.

James’ advisor suggested using a private annuity as a way to reduce his gift and estate tax exposure. Let’s take a close look at the pluses and minuses of using a private annuity.

A private annuity in action

In a typical private annuity transaction, you transfer property to your children or others in exchange for their unsecured promise to make annual payments to you for the rest of your life. It’s “private” because the annuity is provided by a private party rather than an insurance company or other commercial entity. The amount of the annuity payments is based on the property’s value and an IRS-prescribed interest rate. […]