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About Structured Sales / Structured Sale Annuities
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The challenge
Individuals who sell their business or personal property at a gain are oftentimes faced with the dilemma of recognizing the gain immediately or deferring some or all the gain. Generally, the entire profit is ordinarily taxable in the year of the sale. However, by making a sale in one tax year with part of the proceeds payable over the following tax year(s), an eligible seller recognizes the taxable gain in the tax year the Structured payment is received or deemed received. Each payment received is treated as part non-taxable recovery of basis and part taxable gain. Such an arrangement is known as an “Structured Sale".
What is a Structured Sale?
A Structured Sale is a “disposition of property where at least one payment is to be received after the close of the taxable year in which the disposition occurs.”Structured Sales generally permit sellers to defer gain on certain property dispositions to the tax year in which the related sales proceeds are received. Not all property dispositions where payments are received in later tax years qualify as Structured Sales (e.g. sales of inventory, sales by dealers in real and personal property, sales of securities traded on established exchanges, the portion of a sale of real or personal property that is subject to depreciation recapture and certain sales of property between related persons). Sellers should consult with their own independent tax advisor to see if a sale qualifies as a Structured Sale.
How Do Structured Sales Work?
In general, with respect to a typical sale of property eligible for a Structured Sale, the Seller and the Buyer agree that the Buyer will pay a certain amount of the purchase price through making at least one payment after the tax year of the sale. The Seller should consult with his or her own independent tax advisor to see if asale qualifies as a Structured Sale. Each Structured Sale payment received by the Seller consists of the following three components:
Non-taxable recovery of the investment or basis
Taxable gain
Interest
Structuring the Sale Transaction
Once the sales transaction is completed, the Buyer immediately assigns its periodic payment obligations to the Assignment Company. The assignment is effected through executing an Assignment of Obligation agreement. This assignment agreement between the Buyer and the Assignment Company makes no changes to the terms of any prior agreement between the Buyer and the Seller. The Buyer assigns to the Assignment Company the Buyer’s obligation to make the periodic payments as specified in the Assignment of Obligation agreement. The structured sale may appeal to the Seller who has concerns with relying on the credit quality of the Buyer.
The Structured Sale Strategy
A Seller agrees to take part of the funds from the sale of a business or property in the form of periodic payments from the Buyer, or what is commonly referred to as a Structured Sale.
Steps to Complete the Structured Sale
Assuming that there is a valid Structured sale:
1. Buyer and the Assignment Company enter into an Assignment agreement whereby the Buyer transfers to the Assignment Company its obligation to make future payments and thereby making the Assignment Company responsible for making future payments. The Seller is not a party to the assignment, and the Buyer will remain liable to the Seller pursuant to any agreement between the Buyer and the Seller.
2. Broker ensures all necessary documents, including, but not limited to, Purchase Agreement, Assignment Agreement, annuity application, and wire transmittal forms are sent to the assignment company.
3. Buyer then wires funds to the Assignment Company as agreed.
4. The Assignment Company wires funds to the Life Company to purchase an annuity contract, for which it
retains all rights and incidents of ownership.
5. The Assignment Company, for its convenience, directs the Life Company to make payments directly to the Seller.
Assignment Documents and the Assignment Company Obligations
The Assignment Company’s primary business involves assuming liabilities to make periodic
payments to payees on behalf of obligors. An obligor enters into an agreement with the assignment company whereby, in exchange for consideration, the Assignment Company agrees to assume the liability of the obligor to make periodic payments.
The Assignment Company and the Buyer enter into an agreement called an “Assignment.” The assignment document provides that the Assignment Company’s obligation to make the periodic payments to the Seller will be no greater than that of the Buyer/Assignor immediately preceding the assignment.
The Assignment Company subsequently purchases an annuity contract from the Life Company to fund its payment obligations to the payee. The Life Company will accept applications for annuities from the Assignment Company Assignments, Ltd. The Assignment specifically provides that all rights of ownership and control of such annuity contract shall be and remain vested exclusively in the Assignment Company. Although the Assignment Company may direct the Life Company to send the payments directly to the payee, such direct payment would be for the Assignment Company’s convenience only. Thus, the payee has no rights under the annuity contract.
After the purchase of the annuity, the Life Company provides the payee with an “Agreement to Pay” wherein the Life Company states that the payee will receive all payments required to be made by the Assignment Company under the terms of the Assignment of Obligation agreement. The Agreement to Pay is a separate and independent agreement that is entered into by the Life Company at the time the Assignment Company purchases an annuity contract with the Life Company to fund its obligations to the payee. There is no consideration for the Life Company’s Agreement to Pay. This Agreement does not give the payee any status greater than that of a general creditor of the Life Company and does not impose any greater obligation on the Life Company than that of the Assignment Company. The payee is at risk for the insolvency of the Assignment Company and neither the Assignment Company nor the Life Company set aside any funds or assets as security or collateral for the benefit of the payee.
The structured sale transaction involves three independent steps:
Enhancing the Sale of Business, Property or Residence With Tax-Deferred Growth Strategies
For most people, their residence, investment property or company is the single largest asset in their financial portfolio. As a result, there is little doubt that the sale of this asset, all bring monumental tax anxiety to mind for the selling party. With all of the other considerations that are part of this sale, these concerns are paramount to individuals and families who desire to limit the tax hit Uncle Sam takes on their sale.
Until now, a selling party had little option on the sale of their business. Either pay taxes now, or, roll proceeds into a Private Annuity Trust, TIC’s, Charitable Remainder Trusts or 1031 Exchange. All are well known, but carry some drawbacks with their execution and administration, not the least of which, are the significant costs of setup and annual management.
While not the panacea to every situation, a new and exciting product, the Structured Sale, is rapidly growing in popularity. The Structured Sale is providing an opportunity to avoid immediate tax liability and grow funds in a customized manner they design.
Not Your Grandfather’s Annuity
The structured sale annuity takes advantage of two IRS Revenue Rulings respectful to Structured Sales (82-122 [PDF 92KB] & 75-457 [PDF 60KB]) and allows a selling party to place any portion of their net proceeds into a fixed annuity product with a guaranteed yield paid back to the seller. Unlike traditional annuities, however, the new Structured Sale Annuity product offered through Atlas Settlement Group offers unprecedented flexibility in how the guaranteed funds are paid out. The individual can truly design the payment schedule to meet their unique financial needs. Monthly, quarterly, semi-annual or annual payments are all available, as are future lump sums in any combination. Your client has the choice of starting payments immediately (regardless of their age) or deferring payments for up to 20 years, maximizing the tax free growth and creating a subsequently higher yield on the back end.
Perhaps even more important is the fact that a guarantee period can be placed on the payment schedule, ensuring that the annuitant’s Estate will continue to receive funds for as long as 40 years, even if they are deceased. This is a great tool to help supplement retirement, fund a college education for children or grandchildren or provide for future lump sums that can be used to take advantage of other investment opportunities. Moreover, this product offers guaranteed financial security, allowing your client to be more aggressive with other investment opportunities. Best of all, the payments are all guaranteed by the backing of a life insurance company with an A+15 rating by A.M. Best.
Adding Value to the Process
How many times has your client sold their business for less than they had hoped or had to enter into a seller financing relationship in order to secure a larger sales price? By utilizing the Structured Sale concept, your clients can now afford to take a smaller purchase offer in order to relieve their obligation to the listing, knowing, again, that they avoid immediate taxation and can grow the net proceeds to a future dollar value higher than the asking price. Moreover, the seller need not be concerned with the fulfillment of payment obligations from potential buyers in a seller financed sale, as they are not directly dependent on the solvency of the buyer. As such, your client can achieve his financial goals with a lower sales price on his asset, obtain guaranteed long term financial security and avoid any investment risk with the proceeds – especially in today’s volatile economic environment. If you represent the buyer in a transaction, the Structured Sale offers an opportunity to purchase a business or property listing at a lower figure, offering the seller all of the aforementioned benefits and most important – leaving vital working capital for your client to make the necessary changes they wish to make or invest in marketing strategies to grow the production of the business or development of the property/land.
The Fine Print
Does the concept of the Structured Sale Annuity seem too good to be true? There are indeed some restrictions imposed by the IRS, but they are all manageable. In order for the benefits described herein to be realized, the seller must avoid constructive receipt of the funds. The Buyer, at the Seller’s request, will direct appropriate funds to be sent from the escrow account - to the assignment company owned by the life insurance company. The Assignment Company in turn purchases the identified annuity and promises to make all future periodic payments to the Seller. A simple one page sales agreement between the Buyer and Seller includes the necessary language allowing for the structure, with the terms of the agreement governing the payment schedule.
As the minimum premium the life insurance companies will accept is a mere $100,000, you are providing your client a wonderful service when you have them consider a Structured Sale benefit analysis, as part of their sale. There are no associated charges, ever, with the purchase or management of the funds by the life insurance company or the broker placing the annuity – a further benefit over the aforementioned PAT’s, TIC’s CRT’s and 1031 Exchange.
Show Me the Money
Atlas Settlement Group wants to maximize your role as a broker and do all we can to assure your success. We are excited about this investment vehicle and the ability to help your client turn the sale of his listing into a multi-generational legacy. Please feel free to call us if you have any questions or if you want to learn more about how Structured Sale Annuities can help you provide the perfect financial solution for your client.
Illustrations
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"A structured sale annuity offers an exciting new wealth management tool."
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