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A private annuity may be effectively used in family situations where a parent wants to transfer an asset, such as a business interest, to the next generation, free of estate taxes. Typically, the parent sells the asset to his child. In return, the child promises to pay the parent an income for life. This is a legally enforceable contract right, but unsecured.Since the payments to the parent terminate at death, the annuity generally has no value, and therefore, is not included in the parent's estate. To be successful, the present value of the annuity payments has to be equal to the fair market value of the asset being sold. The child takes the risk of the parent living past life expectancy. The parent takes the risk that the child will not meet the current payment schedule. For example, at age 65, the parent has approximately a 20-year life expectancy. Assuming a federal discount rate of 5.8%, the annual annuity generated by property worth $100,000 is $10,129.
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