The New Road to Tax Deferral
Defer Taxes. Maximize the Sale. Secure Your Financial Future.
Structured Installment Sales offer an innovative way for individuals selling a business, property or other appreciated asset (like an art, memorabilia, or vintage car collection) the opportunity to maximize the profits from the sale, and avoid their immediate tax obligation in the year of sale, by placing proceeds from the transaction into an annuity product. In so doing, the seller avoids constructive receipt of the payment and, thus, avoids the tax-obligation associated with those funds. The portion of the transaction placed into the Installment Sale grows on a tax-deferred basis with a tax payment obligation in the future year(s) when payment is received. Structured Installment Sales utilize IRS approved methods to accomplish this growth and are invested with highly rated insurance carriers who provide the investment platform and future annuity payments.
There are currently options to invest in fixed annuity plans, or index-linked annuities that offer guaranteed payment floors, with the upside potential of market growth, based on index performance.
· Fixed options require payments to start within 12 months of closing and offer a yield between 2-3.5% based on the design.
· Index-linked options offer greater flexibility, with first payment deferral up to 40 years and yields between 6-12% based on the design.
Aside from the obvious benefits of tax planning and financial growth to maximize the sale, Structured Installment Sales offer a unique solution for both the buyer and the seller. With no investment minimums or maximums, every sale qualifies for Structured Installment Sale treatment. If designed properly, the investment can provide multi-generational payments and help create peace of mind that loved ones, business partners or other beneficiaries will be financially secure for years to come. Moreover, it allows a selling party to consider a lower financial offer, knowing that the difference can be more than made up through the benefits of the investment.
As a buyer, the use of a Structured Installment Sale allows for a significantly larger offer (often times far exceeding the actual list price), without expending the cash for that offer in the immediate term. This can free up much needed financial capital to make improvements to the land, building or business. The Structured Installment Sale, when used correctly offers a winning strategy for all involved and should help bring deals to a more efficient close for everyone involved. In short, Structured Installment Sales make sense to consider in nearly every sales transaction. There are no associated costs or expenses and an experienced structured installment sale advisor will help coordinate all of the IRS and life insurance company required paperwork for the closing attorneys to incorporate into the sales documents.
KEEP IN MIND – A STRUCTURED INSTALLMENT SALE MUST BE INCORPORATED DIRECTLY INTO THE SALES CONTRACT, AND THE FUNDS BEING INVESTED SENT DIRECTLY FROM THE BUYER TO THE LIFE INSURANCE COMPANY IN ORDER TO MEET WITH IRS APPROVAL AND AVOID IMMEDIATE TAX OBLIGATIONS.
Using guidelines set forth in IRC Section 453, Structured Installment Sales allow an individual the unique opportunity to defer their immediate tax obligation, by placing a portion of their net proceeds into an annuity product, with highly-rated life insurance carriers. Sellers can design a future payment schedule that meets their unique needs, realizing significant income growth through the investment, and paying a deferred tax obligation in the future year(s) when payments are received.
Below, please find additional information from the IRS substantiating the structured installment sale process.
Comparison of Fixed and Index-Linked Options
Sellers of a business or property can choose to place a portion of their sales proceeds into two similar, but subtly different investment options. Option number 1 provides index-linked returns. Option number 2 provides fixed-rate returns. Both options provide the seller with the benefit of tax deferral; the differences come from how the capital gains grow.
Index-Linked Structured Installment Sale by Independent Life
The primary benefit of the Index-linked annuity product that Independent Life offers is the ability for the annuity yield to grow with market performance, while offering a guaranteed payment floor to the selling party. Backed by the Franklin BofA World Index, any proceeds structured with Independent Life can see market-based growth. Also, any money structured is 100% principal protected.
Product Highlights:
Defer first payment up to 40 years
No investment minimums or maximums
Index-linked market-based growth with a guaranteed floor to hedge potential downturns
Flexible payment design including future lump sums
Backed by highly rated life insurance markets
Fixed Rate Structured Installment Sale by MetLife
One of the primary benefits of MetLife's Structured Installment Sale is risk aversion. With this product, the structured money will grow at a fixed rate of return every year regardless of market performance.
Product Highlights:
Backed by an A+ rated company
Guaranteed annual rate of return
$500,000 minimum premium requirement
Payments must begin within 12 calendar months of sale
Case Studies
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William, a 51 year old, sells his company for $25 million dollars. He elects to place $5 million of the sale into a Structured Installment Sale annuity. In so doing, he saves nearly $600,000 in immediate tax obligation. William elects to use the index linked annuity option and defer his first payment 14 years, to his age 65. He will not pay any taxes on that $5 million for 14 years. William will receive monthly payments for 25 years, from age 65 to age 90. With the projected performance of the Indexed Annuity, and based on back-testing to 2006, we anticipate that William will receive between $29.5 million (historical low projection) and $103.5 million (historical high projection). William will pay a two-fold tax obligation, starting in 2037: a pro-rated capital gains tax on the deferred principle and a pro-rated ordinary income tax on the interest earned. Should William pass away prior to the payments being completed, his named beneficiaries will receive the balance of all remaining payments and pay the same tax obligation.
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Michael is a 61 year old rancher and has sold his 20,000 acre property for $32 million dollars. He elects to place $12 million of his sale into a Structured Installment Sale annuity. In so doing he saves nearly $1.5 million in immediate tax obligation. Michael takes a blended approach and places $2 million into a fixed annuity with payments beginning in the January following his sale. The remaining $10 million he places into a index linked annuity and defers first payment for four years, to his age 65.
The fixed annuity will produce a guaranteed monthly income of $10,965 for 25 years. The guaranteed yield is $1,289,710 over that time period.
The index linked annuity will produce a projected yield between $22.8 million and $43 million over a 20 year period.
Michael will pay a two-fold tax obligation, starting in 2024: a pro-rated capital gains tax on the deferred principle and a pro-rated ordinary income tax on the interest earned. Should Michael pass away prior to the payments being completed, his named beneficiaries will receive the balance of all remaining payments and pay the same tax obligation.
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Jennifer is 44 and sells her bakery for $800,000. She elects to place $400,000 into a Structured Installment Sale annuity, saving roughly $150,000 in immediate tax obligation. Jennifer elects to use the index linked annuity option and defer her first payment 16 years, to her age 60. She will not pay any taxes on that $400,000 for those 16 years. Jennifer will receive monthly payments for 25 years, from age 60 to age 85. With the projected performance of the Indexed Annuity, and based on back-testing to 2006, we anticipate that Jennifer will receive between $2.8 million (historical low projection) and $10.6 million (historical high projection). Jennifer will pay a two-fold tax obligation, starting in 2039: a pro-rated capital gains tax on the deferred principle and a pro-rated ordinary income tax on the interest earned. Should Jennifer pass away prior to the payments being completed, her named beneficiaries will receive the balance of all remaining payments and pay the same tax obligation.
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David and Elizabeth are in their mid-30’s and inherit land from their family. They sell the property for $4,300,000. They consider a 1031 Exchange, but cannot find a property that they want to purchase, at a price they are comfortable paying in today’s market. Their fear is that the available properties prices are artificially high and that they may be poor investments in the next 12-24 months. David and Elizabeth decide to place $3,300,000 into an index linked Structured Sale Annuity. In so doing, they save approximately $725,000 in immediate tax obligation. Wanting capital to reinvest in the real estate market over the next 20 years, David and Elizabeth design a lump sum scenario, where they will receive payments in 10 years, 15 years and 20 years. This gives them plenty of time to research properties they are interested in purchasing, knowing that they will have substantial payments due to them on identified dates in the future to do so. Their objective of saving immediate tax obligation and being in a position to re-enter the real estate market when they are comfortable doing so have been met and they did not have to purchase a property they did not want through a 1031 Exchange due to a lack of available inventory at the time they sold their property.
This August, we were pleased to attend and participate in the annual BEI Conference in Denver, Colorado. Please view the Podcast we recorded with John Brown, CEO of BEI.
FAQs
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In accordance with the IRC section 453, taking the proceeds from the sale of a capital asset in installments or periodic payments over a prearranged period and as a result deferring the tax liability into the year in which the funds are received.
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In a structured installment sale, the seller transfers the risk and the obligation to make the future payments from the buyer to an assignment company which then makes said future payments to the seller via an annuity contract.
In a traditional installment sale, the seller must rely on the buyer to make the future payments, therefore increasing the risk of possible default and keeping the buyer and seller contractually bound to one another for the life of the program.
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Non-tradable capital assets. i.e., qualifying property or business sales that are eligible under IRC section 453.
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Yes, using iStructure from Independent Life, you can defer starting payments for up to 40 years. Lump-sum options, at future identified dates, are also available through the iStructure index linked annuity option. Payments with the MetLife, fixed annuity option, can be deferred as well, but only up to 13 months from the date the sale is closed.
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The primary advantage to a structured installment sale is the immediate deferral of tax obligation on the portion paid into the annuity at the time of sale. By sending the funds directly to the life insurance carrier to fund a structured installment sale, the seller avoids constructive receipt of the funds and cannot be taxed on that portion of the sale at the time of closing. Funds will grow in the annuity and be paid to the seller as defined in the annuity contract and the seller will owe a tax obligation in the future year(s) when the annuity payment is received. They will only pay taxes on the annuity payments received in a given tax year. They will owe a deferred and pro-rated capital gains obligation as well as an ordinary income tax on the interest earned through the investment yield paid that year from the annuity.
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Structured installment sale payments are fixed when using the MetLife annuity option and will not change during the life of the contract, regardless of market performance.
Structured installment sale payments with the Independent Life iStructure product are powered by the proprietary Franklin BofA World Index. For more information on that Index, please click here.
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If the Payee passes away prematurely, all remaining structured installment sale payments will be made to the designated beneficiary/beneficiaries identified by the Payee. The beneficiary will receive the payments and owe the same required tax payment obligation as described in question five (5).
