private annuity

A private annuity is an arrangement where an individual (the “ annuitant ”) transfers assets to another (the “ obligor ”) in exchange for regular payments for the remainder of the annuitant’s life (an “ annuity ”). A private annuity is distinguished from a regular annuity in that in a private annuity the obligor is not in the business of selling annuities. Often private annuities are created between family members, for example, from a parent to a child.

Benefits of private annuities include:

• The property is removed from the seller's taxable estate .
• If the promised annuity payments equal the value of the property, the seller avoids gift tax .
• If the annuitant dies before the annuity payments equal the value of the property, any remaining untaxed gain will escape tax.
• The annuity property remains within the family. This can be especially important for items that have great family significance, such as family heirlooms.

Disadvantages of private annuities include:

• The obligor's promise to pay the annuity is unsecured.
• If the parent survives the child, the child's estate must continue to make the annuity payments out of the estate assets.
• If the annuitant lives longer than expected, the obligor’s payments to the annuitant may be more than anticipated.

[Last reviewed in August of 2020 by the Wex Definitions Team ]

Wex

• PROPERTY
• trusts, inheritances & estates
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