PATs and the 10 Year

[SD Realtor]

I should have posted these as seperate posts but I am being lazy…

First off, anyone have some insight into the latest rally on the 10 year? The yield is at 4.901 right now…Is this smart money thinking the next recession is gonna be a whopper? Are the buyers our usual friends across the Pacific?

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Second item is more of a question that I thought I brought up before and I couldn’t find it…

Anyone have knowledge about Private Annuity Trusts? I have read they are an efficient method to defer capital gains on property that you have depreciated extensively or even primary owned property that you sell and exceed the capital gains exclusion amount.

Briefly, say you own a rental that you have depreciated for say 15 years. So you dont want to 1031 it and you dont want to get hammered by Uncle Sam… So prior to selling it you transfer it into the trust. Then it sells. The money goes to the trust. You only take annual payments from the trust. Each time you receive a payment you pay your cap gains but as a percentage of the payment. Meanwhile all that money in the trust may be invested by the trust in any investment vehicle you want. The trick is figuring out the payment schedule. I believe it is based on mortality tables but that is a very non educated guess.

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Rich have you heard of these vehicles?

[equalizer]

SDrealtor

The black helicopters are starting up. Ben should be opening his suitcases full of money soon. 10 year yield cant go too much lower, probably 4.5 worst case in next 6 months. But if major recession starts next year, Ben will cut FF rate to 4.5 and yield could go lower.

As for Private Annuity Trusts, all I know is from the radio show am 1000 from 3-4 weekdays I think where they are always making fancy claims about RE. I think One major problem with these trusts is that everyone is trying to sell you one. Therefore there must be massive commissions and fees that they will STEAL from you. You should probably talk to Ray Lucia http://www.raylucia.com(am 1700 9-noon) and get advice/sale pitch from him. Then please post your findings.

[SD Realtor]

Equalizer –

Totally agreed with you… To be honest I am prety suprised the yield is as low as 4.9… I would assume big Ben is none to happy about that… Like I said though, I just wonder if it is an early sign that maybe some think the upcoming recession will be a bit harsher then we all believe…

I am just wondering, if the bond market stays strong and then there is a recession, and energy prices stay high, and unemployment ramps up that will put old Ben in a real pickle…If the topper is that inflation doesn’t abate what steps will, or can, Ben take? Aye caramba…. Wouldn’t that be a trip… The 10 year down at 4.25 or 4.5 and the prime a half point above it! I guess not… Ben would HAVE to drop the prime… I am not to savy on stuff like that so I am not sure what the proper actions are for him to take.

Anyways yeah I hear the same thing about PATs…..I asked my CPA and the attorney for our trust about them and the answers I got were all pretty vague… I asked Powayseller about them to, so if anyone can find out about them I am hoping she can.

My wife and I actually have used Rick Plum for some work and are currently working with Rob Butterfield as well so I am very familiar with Ray’s show. I asked him about it one time when we saw him speak at the Marriot in La Jolla but he didn’t really give me an answer.

[LA_Renter]

I posted this on the Pause or No Pause thread

If the Fed pauses, doesn’t the story then become about the dollar. I was reading the Bank of Italy post and it looks like they are dumping their US Treasuries in anticipation of the the FED coming to the end of its tightening. Now won’t that put pressure on the long bond pushing up yields and mortgages? Right now the 10 yr is yielding about 4.9% down from about 5.22 last month so obviously traders are pricing in an economic downturn. At what point will a weakened dollar begin to impact US Treasuries? Point being this “pause’ could push mortgages higher.

[Anonymous]

Chris Johnston

I attended a seminar in Del Mar about PAT’s a few months ago. One of the foremost experts in the country is a San Diego attorney. He is also going to help me with some other business issues. His name is Carl Dimeff his office number is 760-633-1965. He is located in Encinitas. The seminar was hosted by Robert Campbell. You could just say you attended and had some further questions, he would not know whether you were there or not.

Your understanding of the premise of it is correct.

[privatebanker]

I’ve used PATs to assist a few clients in deferring their capital gains in the past. The key is to consult a knowledgeable attorney and possibly a CPA first. An example of a solution I provided a client (may not be suitable for you):

Client owned a commercial property with a low cost basis of which was now worth roughly $15,000,000.00.

Referred him to a trust attorney and created a PAT. Then transferred the property into the trust (non taxable event).

He then sold the property and we reinvested the entire sales proceeds into a tax-free bond portfolio, no capital gains taxes paid.

The client now receives a predetermined annuity payment. Payments are determined by the IRS life expectancy tables. He now only pays capital gains taxes on the principal annuity payments received (far less than the taxes he would have paid on the sale). Plus the tax-free income from the bonds which equates to a substantial amount.

It’s not a bad strategy as long as the IRS agrees to it. Consult a good trust attorney.

[privatebanker]

One last bit, PATs are irrevocable trusts. If you feel that you would need to access more of the principal than the annuity payment provides, this may not be a good solution. Again, something an attorney can help you with.

[waiting hawk]

I like most of Robert Campbell’s post on that SDCIA forum.

My website tracking Temecula and South Riverside County

[SD Realtor]

Thanks ALOT guys

Cool so the PATs worked pretty much like I thought they did. The trickiest thing to me is how to figure out the annuity payments which is what I figured. Privatebanker you mentioned that the calculations were calculated by the IRS? I would figure then that they are based on mortality rates. Yes I did know (and should have mentioned) that the trust is irrevocable.

A few more questions, (sorry if they are dumb)…

– you mentioned that the interest earned on the investments that the trust makes is also taxed. Is the entire interest earned each year taxed or do you take part of that interest in your annuity and that is also taxed?

– also I can you tell me what happens if you pass away? I recall that the trust can be passed on to your hiers. Also is the cost basis recalculated or no? I guess no since the cost basis of the home that was sold no longer has any meaning.

Also yes to everyone that mentioned that make sure you have a good trust attorney and CPA for these vehicles. I agree. Both my CPA and trust attorney are good but both have admitted to me they have not had experience with PATs.

[privatebanker]

No problem SD Realtor, here are answers to your questions.

To clarify first of all, the annuity payments are based on the age of the owner(s) of the asset, the asset’s value and the AFR (IRS interest rate AKA Applicable Federal Rate). These factors will determine what your annuity payments are.

Taxes are paid on the annuity payments received plus if you have any additional cap gains or interest income from the investment vehicle of your choice. Just remember, trusts are taxed at a lot higher rate if the annual income from the investment vehicle exceeds something like $10k (not to be combined with your principal annuity payments). I would confirm this with a CPA. I’ve used tax-free bonds in the past because of the compressed tax tables for trusts (may not be suitable for everyone however).

If you pass away, the trust would remain until the last owners demise. Beyond that, the remaining funds are transferred to it’s beneficaries tax-free. Again, check with an attorney/cpa on that piece, who knows with the IRS.

I hope that helps! I’m not a Trust Attorney just a Private Banker and have worked with these issues for clients several times. They seem to be great alternatives to CRTs if the client wants to keep the money in the family, etc. Consult a Trust Attorney and CPA.

[Author]

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