Before 2006, a private annuity trust (PAT) was an arrangement to enable the value of highly appreciated assets, such as real estate, collectables or an investment portfolio, to be realized without directly selling them and incurring substantial taxes from their sale.
[citation needed] With these advantages, a PAT provided an alternative to other methods of deferring capital gains taxes, such as the charitable remainder trust (CRT), installment sale, or tax-deferred 1031 exchange.
As of October 2006 the Internal Revenue Service (IRS) proposed a rule that would have provided that the PAT was no longer a valid capital gains tax deferral method.
[citation needed] PAT payment amounts are based on IRS Life expectancy tables for a single individual, or for the joint lives of the asset owner and his or her spouse.
[citation needed] To preserve the benefits of a PAT, a trustee must be independent, the annuity cannot be secured in any way, and annuitants cannot have any control over the trust or its investments.
[citation needed] The primary benefit of a PAT is that it allows the full appreciated value of the asset to be invested and to earn income before capital gains and recapture taxes are paid.
If the owner dies before living out his or her life expectancy, the trust might be required to pay a portion of the deferred capital gains taxes.
[citation needed] The investment of the pre-tax proceeds potentially gives private annuity trusts the ability to generate substantially more money over the long run than a direct and taxed sale.
[citation needed] These benefits in many cases enabled a PAT to provide superior results as compared to a charitable remainder trust (CRT), installment sale, or tax-deferred 1031 exchange.