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How to defer capital gains taxes

Ensured Installment Sales

installment sale

Ensured Installment Sales (1), or “Structured Sales” (2) are simply traditional installment sales, but with a substitute “obligor” for the purchaser.

In a standard cash sale transaction, problems may arise when a seller is reluctant to part with his property or company, because he doesn’t want to pay “all those taxes.”

Enter the installment sale strategy. In a traditional installment sale contract, covering appreciated real estate or a closely held business interest, the purchaser makes a promise to pay future payments in exchange for the seller’s eventual title to the property, or stock in the business.

Further problems arise, however, with sellers who are reluctant to accept the buyer’s promise to pay future installment payments, when a default could mean that seller receives back his property or business after either has depreciated significantly due to market conditions, mismanagement, or both, along with the legal expenses involved in foreclosure.

The Ensured Installment Sale solves these problems. By substituting a major U.S. life insurance company as obligor and guarantor of the future installment payments, seller gets the financial promise of a highly rated institution instead of the buyer, who may have substantial assets of their own, but certainly not of the magnitude and track record of the insurance company.

Mechanically, all of this is accomplished by adding clause work to the installment sale agreement that says, in part, that buyer will assign his liability for the future installment payments, to a third-party company affiliated with the highly rated insurer, and that the affiliated company will purchase an annuity policy from the insurance company that will guarantee to make the future installment payments to the seller.

The buyer then deposits enough dollars into an escrow account, to make this happen. Seller, if satisfied with the insurance companies’ credit ratings and history, can release title to the property, or transfer stock in a closely held business, knowing that should the economy or markets turn down, or should the buyer mismanage the assets, there is no way that those circumstances will affect seller’s receiving his promised installment payments.

To understand more fully how an Ensured Installment Sale can benefit you, please contact us.

(1) Service Mark of Settlement Professionals, Inc. (2) Service Mark of Allstate Insurance Company

 

 


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