Property settlements.

In private letter ruling (PLR) 9644053, the Internal Revenue Service said a divorcing couple could use an annuity to equalize the division of their property without selling their principal asset.

A husband and wife, residents of a community property state, proposed a marital property settlement in anticipation of their divorce. Their primary asset was an interest in the A&B corporation, the husband's employer. Both husband and wife believed selling the A&B stock would have a substantial disruptive effect on A&B's operations, so they agreed the husband would resign from A&B and the wife would receive all the company's stock and a portion of other community property. The husband would receive the majority of the other community property.

The couple also agreed to use a trust as an annuity to equalize the distribution of the property because a significant portion of the value of all community property was the A&B stock. According to the trust agreement, all of the property transferred to the trust would become the husband's separate property. During the husband's life, the trustee would distribute as much of the trust income and principal as the trustee deemed appropriate for the husbands happiness, enjoyment, comfort, travel, living expenses, support, maintenance, education and health. IRS temporary regulations said no gain or loss would be recognized if the transfer of property took place within six years of the divorce and any transfer occurring after six years would be presumed to be unrelated to the divorce.

In PLR 9644053, the IRS said that because the husband and wife did not anticipate that the A&B stock would generate enough cash to enable the wife to pay the annuity to the husband within six years, a valid business reason existed to spread the payments out over the husband's lifetime. Thus, the transfers of property and cash between the husband and wife would be tax-free under IRC section 1041.

Observation: Even though the husband and wife resided in a community property state, divorcing couples in other states also can take advantage of the annuity method in equalizing their marital assets.