STRUCTURED SALES, A KEY PLANNING TOOL TO DEFER GAINS ON THE SALE OF REAL PROPERTY
The best way to sell your business or real property and to ALSO secure a guaranteed stream of income is through a "structured sale".
There is almost no doubt you are here looking at this content page wondering what in the world a "structured sale" annuity is and how it might be useful in your particular situation. While this concept might be new to you, this secured method of selling your real estate, business or other qualified real property, is one of the least known and more poorly understood financial tools in the tax and investment community today. There are plenty of reasons why that is the case, but rather than going into them all here, what I'll try to do in this section is give you a greater understanding of the product, it's use and most importantly, how you can begin to take advantage of it in your own business or personal planning situation.
What is a "structured sale" and why would you use one?
A structured sale, so named by the company that created the concept, Allstate Life Insurance Co. is a very simple planning took that combines the best elements of a structured settlement periodic payment annuity and combines it with the tax rules governing Installment sales. As you might know, installment sales or real estate have a long and established tax history, over 50+ years, and they are used in transactions when the seller of real property, typically a business or some real estate, wishes to defer their huge year one tax hit and instead spread it over a period of years. This is where the term "structure income" comes from in that you can design a flexible repayment that fits the planning needs of the seller. What the "structured sale" annuity or trust allows is to for the seller to create an installment sale, and then fully fund the future payments, earning interest along the way, all paid on a schedule designed by the seller to best meet their future plans.
Are you selling a Business or Personal/family property?
Many individuals selling a business, a professional practice or personal property would like to liquidate their investment in those assets at peak market value, but with out having to at the same time recognize a huge taxable gain and tax bill in the year of the sale. For people who want to reduce or eliminate year one tax hits, invest the proceeds of their sale at interest and defer income and taxes into future years, the structured sale annuity is a powerful tool. However, keep in mind this only works for the sale of Real Assets. In other words it is not a deferred compensation tool to be used on commissions, ordinary income, or any other type of revenue not associated with the sale of a long term capital asset as defined by the IRS.
What is an installment sale and how do you qualify for one if you are selling property?
While I don't provide tax advice, it is generally agreed that for a sale to be considered an installment sale it must first be a sale of a qualified property where you receive at least one payment after the tax year of the sale. Each installment payment you receive after closing consists of the following components; 1. The non-taxable recovery portion of the original investment. 2. Taxable gain component of the original investment and 3. Interest income on the money while it is held with the funding company.
What should you consider when using a structured sale annuity to fund your installment sale?
First, in a non-structured installment sale the seller receives the payments from the buyer of the property in future tax years. Given that the seller is 100% dependent upon the buyers credit worthiness as to future payments, it is obviously crucial to consider who that buyer is and do they have the resources and track record to assure you that you will in fact receive your promised payments. This single fact, credit risk, is the primary reason most people avoid installment sales. Other than using "structured sale" annuity which has a secured guarantor or payments, there is almost no way to reduce or minimize this risk of a private buyer defaulting on the installment sale.
This illustrates one of the primary benefits of using a structured sale annuity or trust as part of your installment sale arrangement. You effectively transfer the risk of the future payment guarantee away from a private buyer and instead substitute a secure insurance company or fully US Treasury funded trust to make the payments, thus reducing or eliminating credit risk from the decision to structure.
By using this product through a specialist like Wahlstrom & Associates, the sale can be structured so that the periodic payments will be funded through a state regulated trust company who will design the bond portfolio, or if any life insurance companies enter the market again, you can fund at that time with an annuity from a large, highly rated life insurance company. Both these scenario's build into the transaction the assurance that the future payments will be paid by the trust or life insurance company, and not the buyer, thus upgrading the security of the transaction by a huge margin.
How do you go about setting up a Structured Sale of Real estate or business property?
This is a field where unfortunately the level of professional competence is quite low across the life insurance and tax planning community. Very few structured settlement experts or real estate brokers have the necessary depth of knowledge in tax planning, business planning and estate planning to work on these sales in a compliant fashion as to design, funding and execution at closing. Be careful who you deal with and make sure they have actually closed sales using this process and can demonstrate their knowledge. That said, the actual process of the sale and quotation process is quite simple compared to more complex transactions such at private annuities and 1031 real property exchanges and the document process is very simple when included into the P&S agreement by an experienced structured sale specialist.
1. You enter into an installment sale agreement under which a buyer promises to make periodic payments for a stated number of years, and then you have the funding trust company or life insurance company run a quotation for you illustrating the payment options you desire using a net sales proceed you want allocated to the structured sale for deferral.
2. The buyer then assigns their obligation to make those periodic payments to an assignment company, which in the case of both trust companies and insurance companies is typically an owned subsidiary of the funding company.
3. The assignment company funds the payment obligation to guarantee the outlined deferred income plan by purchasing an annuity from the life insurance company or in the case of trust companies, buying a basket of US Treasury's sufficient to meet the obligation.
4. The trust company or the life insurance company then begins making the payments to the seller as agreed to under the terms of the sale and issues an agreement to pay on the performance of the assignment company as a further guarantee to the seller and recipient of the deferred payments.
It's really just that simple and the paperwork is exceptionally modest compared to other means of deferral or more esoteric tax deferral options for real estate investors.
What are the benefits of a structured installment sale annuity?
First of all you get to defer the recognition of taxable gain until future year. As deferral is almost always preferable to immediate recognition of income and the huge tax hit that comes with it, the seller has the opportunity to move payments out to the future when tax rates or brackets might be lower or when they might have other off setting deductions to further reduce the tax bite.
Second, you get a guaranteed rate of return from the trust company or life company. Just like with any other fixed annuity product you get a fixed, guaranteed payment schedule at a stated rate of interest.
Third, through the structured sale you eliminate concerns about the buyers ability to make the future payments that are so crucial to the seller in an installment sale. The funding trust company or life insurance company stands in place of the buyer and makes the payments directly to the seller.
Finally, this program allows for long term financial security and flexible planning options. By using a structured sales annuity you can do monthly, quarterly, annual and semi-annual payments. You can also do other unique features such as balloon lump sums, increasing income streams and deferred income streams that don't start until many years after the sale. There are almost no limits to how you design the cash flow, it's up to the seller and their adviser to devise the best options in partnership with the structured sales expert.
Do you want to know more about "Structure Sales"?
Wahlstrom & Associates has spent the last 12 years developing a particular emphasis in their annuity practice to assist financial professionals, tax lawyers, estate planners and CPA's in learning about this powerful tool. Now with Baby Boomers looking to cash out of long held real estate assets and to develop retirement plans, the ability to eliminate year one taxes at the time of the sale and push taxes into future years is going to be a powerful incentive to examine this tactic.
If you are a private investor or seller of real property and are interested in learning whether or not this product is right for you, please go to my contact page and email me with your questions and requests and we will be happy to assist you. Our practice is national in scope and we have affiliated experts in almost every state in the US, so we can be sure to at least start you on the right path to determine if this planning tool is right for you.