Structured Installment Sales
Maximize the Sale. Defer Taxes. Secure Your Financial Future.
What is a Structured Installment Sale?
How to use a SIS for effective tax deferral
A Structured Installment Sale (SIS) is a vehicle that allows individuals to sell an appreciated asset (such as a house, an antique, valuable memorabilia, or a business) and receive all of the proceeds as income, received over time, through installments. The vehicle for this is either fixed or index-linked annuity.
Unlike the more well known 1031 exchanges, where a new purchase is made which locks up an asset with another similar asset, the Structured Installment Sale releases the proceeds from an asset sale into gradual income via the annuity. As a result the immediate tax liability in the eyar of sale is avoided as proceeds are placed into an annuity product which pays out gradually, over time. In so doing, the seller avoids the constructive receipt of the payment and, therefor, avoids the tax-obligation associated with those funds.
Fund Options
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.
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.
Structured Installment 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.