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Easing tax bite on gains
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March 21, 2000: 11:22 a.m. ET
Private annuity trust can save you from paying hefty taxes all at once
By Staff Writer Jennifer Karchmer
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NEW YORK (CNNfn) - You've operated a family-owned business for years, but you're ready to hang it up and retire and let them run the show. How do you sell your portion of the business to your relatives without incurring a huge tax bite in capital gains?
Well, you can't exactly avoid handing over a check to Uncle Sam altogether, says William Hopkins Sr., an estate planner in Jackson, Tenn. But you can spread out over your lifetime what you owe in taxes rather than paying the government in one lump sum.
Hopkins developed a private annuity trust for a client who had $280,000 worth of stock in the family-run construction business.
"The primary purpose of this trust was to defer capital gains over a long period of time," said Hopkins, a member of the National Association of Financial and Estate Planning (NAFEP) of Salt Lake City.
If the client sold his portion of stock directly to his brothers, who were running the company, he would owe the IRS capital gains tax within 90 days, Hopkins said.
Instead, under a private annuity trust, the client sells his stock to the trust, which sells the stock to the relatives. The client still pays capital gains but it's spread over the length of his lifetime, allowing him to invest that portion.
"Historically speaking, if you invest, it can grow to be a big amount," Hopkins said. "If it's going to Washington, how's it going to grow for you?"
The capital gains tax is calculated by subtracting the stock's original cost, known as the cost basis ($50,000 in this case) from what the stock is valued at today ($280,000).
Then multiply that amount ($230,000) by the client's long-term capital gains rate (20 percent), which is based on his taxable income, which in this case is more than $100,000. Therefore, the client owes $46,000 in capital gains tax.
The man's children, who have been named the beneficiaries, receive the balance of the trust upon his death. However, Hopkins notes that the kids are responsible for paying the balance of the capital gains tax the man owed upon his death. 
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