Below is a list of items that an adviser needs to be cognizant of when dealing with a Private Annuity sale and an Asset Protection Trusts. This is not a process or exhaustive list of all steps required; rather it is a list of common missteps or misrepresentations that can occur during the transactions life cycle.
Set and manage expectations beginning to the end
- Clearly inform the clients that they must be at arm’s length with the Trust’s investments. Instruct them that they do not have direct control over the Trust, the Trustee or investments
- Explain the transaction life cycle, end to end as it relates to the annuity payments, Corporate Trustee’s role and responsibility, the annuitant’s role and responsibilities, the taxes inside and outside the Trust, annual tax return requirements, Gift Returns.
- Make sure you know all the tax impacts of a transaction.
- The sale of business assets are the most complicated transactions and they require the review of accountants and attorneys to understand the implications and requirements for completing this type of asset sale/transfer
- Completion of Funding of the trust with the Real Estate or Partnership/LLC shares and Execution of all agreements are done prior to any specific asset (ESPECIALLY Real-Estate including tangible/intangible assets) being listed to sell and recommend not doing any preliminary preselling of the assets of any kind
- Establish the correct titling and valuations of the assets for eventual sale/transfer is current and established prior to the sale to your asset Protection Trust as far in advance as possible, before a plan is set to list and eventually sell the asset. If a property is listed already it’s advisable to un-list the property and then begin a sell transaction with the Asset Protection Trust and execute the arms-length sale with the trust using the Private Annuity Agreement. If one is already in place or has closed, then it is too late to do.
- Insure that a contract is completed after the property sale. The Private Annuity is not complete or legal until the contract is delivered to the annuitant
- Do not start or allow annuity payments to begin until the agreement has been delivered.
- Establish that changes in the annuity start date may require an extra fee as does other changes after the engagement.
Investments- when assets are sold by the trust
- Be very cautious about using fixed or indexed commercial annuities as an investment choice. These products can have the following issues:
– Inability to achieve the best returns possible
– Inability to meet the cash flow timing needs due to rules regarding withdrawals or early withdrawals
– Inability to minimize the tax impacts on the Trust once the payment starts - A well balanced tax efficient and properly allocated portfolio is required.
- A portfolio that meets cash flow requirements, via performance, but minimizes risk is needed
- Investment adviser should run at least annually trust cash flow projections based upon year to date performance versus projected performance
- The Trustee needs to be accountable for performance and maintain oversight of the investments. The Trustee must take decisive action if they feel that the investment advisor or money managers are not meeting the expectations or requirements.