Question: My wife -- age 55 -- and I -- age 62 -- jointly own the stock in a business and the property on which it is located. Our only child -- age 35 -- works with us. As a part of our divorce, I am purchasing my wife's stock in the company; however, we are having a dispute over how to handle the real estate. I would like to get her out of the picture and buy her interest in the real estate and building, but she thinks the land is worth a lot more than it is. I don't want to pay her rent because we use the rental income to pay a rather substantial mortgage. The lawyers are at an impasse. Do you have any suggestions?
Answer: Since we assume that your son will be the beneficiary of your wife's estate, she may want to consider using a private annuity which can be used effectively in family situations to transfer an asset from one generation to another without estate taxes. Here, your wife could sell the land to your son in return for his unsecured promise to pay her a fixed amount of money for her life in exchange for a transfer of property to your son. The amount of the payment is based on annuity table valuation factors. Part of each payment is not taxed, part is capital gain, and part is income. If a lower payment is negotiated, there may be gift tax from your wife to your son.
At your wife's death, your son's cost basis in the property will be adjusted to reflect the amount paid to her. Since payments to your wife would terminate at her death, the private annuity is generally considered to have no value and should avoid estate taxation. Since you are near retirement and are interested in continuing the business through your son, you may also think about disposing of your interest in a similar fashion.
Warnings: Although it is a contract that is legally enforceable, the private annuity cannot be secured by a mortgage. Your son, if he is married, may get divorced and he may be required to go through exactly what you and your wife are experiencing. Or, he may die before his time. If you think this option may be viable, make sure you hire attorneys and accountants who fully understand and can explain all ramifications before you act.
