Understanding Private Annuity: A Guide for Smart Retirement Planning

When it comes to planning for retirement, many people focus on saving and investing but fail to consider how they will generate income once they stop working. That’s where private annuity comes in. 

In this guide, we’ll explore what private annuity is, the benefits and risks associated with it, how to set it up, and real-life examples of private annuity in action. By the end of this guide, you’ll have a better understanding of private annuity and how it can fit into your retirement plan.

What Is a Private Annuity?

A private annuity is a type of agreement between two parties, typically family members or friends, where one party (the annuitant) transfers ownership of an asset, such as property or securities, to the other party (the obligor) in exchange for guaranteed income payments for the rest of the annuitant’s life. 

Private annuities are typically structured as a form of sale, with the obligor buying the asset from the annuitant in exchange for the promise of future payments.

It’s important to note that private annuities are different from commercial annuities, which are sold by insurance companies and are typically based on actuarial calculations and other assumptions. Private annuities are not regulated by the government or subject to the same rules as commercial annuities.

One of the primary advantages of a private annuity is that it can provide the annuitant with guaranteed income for life, regardless of market conditions or other factors. Private annuities can also offer tax advantages and estate planning benefits, which we will explore in more detail in the next section.

However, there are also risks associated with private annuities, including counterparty risk and inflation risk, which we will discuss later on.

Benefits of Private Annuity

Private annuities offer several benefits that make them an attractive retirement income strategy for some individuals. Here are some of the main advantages of private annuities:

Guaranteed Income for Life

One of the primary benefits of a private annuity is that it can provide the annuitant with guaranteed income for the rest of their life, regardless of market conditions or other factors. This can provide peace of mind and help ensure that the annuitant does not outlive their retirement savings.

Tax Advantages

Private annuities can offer tax advantages for both the annuitant and the obligor. The obligor can defer taxes on the sale of the asset until they receive payments from the annuitant, potentially reducing their tax burden.

The annuitant, on the other hand, can receive payments that are partially tax-free or subject to lower tax rates, depending on their age and other factors.

Estate Planning Benefits

Private annuities can also offer estate planning benefits, as they allow the annuitant to transfer ownership of an asset to the obligor without triggering gift or estate taxes. This can help the annuitant reduce their taxable estate and pass on more of their wealth to their heirs.

Flexibility

Private annuities can be structured in a variety of ways to meet the needs and preferences of both parties. For example, they can be set up to provide fixed or variable payments or to adjust for inflation over time. 

They can also be structured to provide payments for a certain period of time or for the rest of the annuitant’s life.

Risks of Private Annuity

While private annuities offer several benefits, they also come with some risks that should be carefully considered before entering into an agreement. Here are some of the main risks associated with private annuities:

Counterparty Risk

A major risk of private annuities is counterparty risk, meaning that the obligor may not fulfill their obligations and default on payments. 

Should the obligor become unable to meet payment requirements due to insolvency or some other factor, those who depend on this income stream could be at a loss for guaranteed funds they thought were secured.

Inflation Risk

Investing in a private annuity comes with the risk of inflation, which is when prices rise faster than your payments. 

This can drastically reduce an individual’s purchasing power over time and bring financial difficulties to those who rely on their annuity income. Therefore, it is essential to be aware of this danger before investing in such products.

Interest Rate Risk

Private annuities can also be affected by interest rate risk, which is the risk that changes in interest rates will affect the value of the payments. If interest rates rise, the value of the payments may decrease, potentially causing financial strain for the annuitant.



Longevity Risk

Finally, private annuities are subject to longevity risk, which is the risk that the annuitant will live longer than expected. 

If the annuitant lives longer than expected, the obligor may be required to make payments for a longer period of time, potentially causing financial strain.

How to Set Up a Private Annuity

Setting up a private annuity requires careful planning and consideration. Here are the key steps involved in setting up a private annuity:

Determine the Asset to Be Used: The first step in setting up a private annuity is to determine the asset that will be used to fund the annuity. This could be property, securities, or other assets that the annuitant owns and is willing to transfer to the obligor.

Agree on Payment Terms: Once the asset has been identified, the annuitant and the obligor need to agree on the payment terms, including the amount and frequency of payments, the duration of the annuity, and any other terms that are important to both parties.

Obtain Professional Advice: It’s important to obtain professional advice before entering into a private annuity agreement. An attorney, financial planner, or tax professional can help ensure that the agreement is structured in a way that meets the needs of both parties and complies with applicable laws and regulations.

Consider the Tax Implications: Private annuities can have significant tax implications, both for the obligor and the annuitant. It’s important to understand the tax implications of the agreement and to structure the annuity in a way that minimizes taxes for both parties.

Document the Agreement: Once the terms of the annuity have been agreed upon, the agreement should be documented in writing and signed by both parties. The agreement should include all of the key terms of the annuity, as well as any other provisions that are important to both parties.

Transfer Ownership of the Asset: Finally, the annuitant must transfer ownership of the asset to the obligor in exchange for the annuity payments. This transfer should be completed according to the terms of the agreement and any applicable laws and regulations.

If you wish to set up a private annuity, you should seek professional advice to ensure that the agreement is structured in a way that meets the needs of both parties and complies with applicable laws and regulations.

Contact Doane & Doane for Assistance Setting Up a Private Annuity

If you’re considering setting up a private annuity as part of your retirement income strategy, call Doane & Doane. Our team of experienced attorneys and financial planners can help you navigate the complexities of private annuities and create an agreement that works for you. 

Contact us today by calling 561-656-0200 to schedule a consultation and learn more about how we can help you achieve your retirement goals.

Note:The information in this blog post is for reference only and not legal advice. As such, you should not decide whether to contact a lawyer based on the information in this blog post. Moreover, there is no lawyer-client relationship resulting from this blog post, nor should any such relationship be implied. If you need legal counsel, please consult a lawyer licensed to practice in your jurisdiction.