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 updated in August of 2020 by the Wex Definitions Team]