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Law Offices of Ronald W. Rutz
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June 5, 1998: Sheltering Profits; Lottery - Annuity vs. Cash

Q: I have read a lot about sheltering $250,000 of profits ($500,000 for a couple) from the sale of a home used as a principal residence. Did any other real estate deferments survive?

A: Yes, a 1031 like kind exchange is still permitted, and one type called the Starker Exchange is still very much alive and well. At the time of the closing, the proceeds from the real estate sale need to be placed in a properly established escrow. Then the seller must identify the property to be acquired within 45 days following the closing and actually close within six months of the first closing. To the extent that the purchase price of the new property is less than the sales price of the old property, a tax will be imposed on the difference.

Q: If I win the lottery, is it better to take the annuity or to take the cash?

A: Talk about putting me on the spot! Now, that question has no right answer for everyone. But over the years working with a number of other professionals in related areas, such as accounting and financial planning, I have found that the answer has always been to take the money and run! There is a formula that can be used, so if a precise answer is important to you, before you buy your ticket, try using it. Otherwise the conventional wisdom is to take the lump sum because you are then in control. You are in a better position to react to a changing world.

You can hopefully invest the funds and obtain a better net rate of return than the institution administering the account. If you take the annuity and later sell the right to receive the payments, the amount that you receive usually is significantly less than the initial lump sum would have been. Also, if you take the annuity and then die before the payout period ends, your estate has a nonliquid estate tax spike upwards in the amount of the present worth of receiving that remaining future flow of money and your beneficiaries get to enjoy the funds, not you.

The down side is that it will take a number of years to regain what you lost by initially paying the taxes up front, depending on your tax bracket and rate of return or appreciation. Also, you may not be so hot at investing as you thought. And often most people do not invest but spend what they received, usually within the first three years. A side issue in some states, but not as important in Colorado, is that potential judgments and/or liens might have a harder time attaching or being enforced if an annuity were present.

Remember, your own advisors, given your particular situation, such as age, spending habits, level of financial "sophistication", income tax bracket, etc., may suggest taking the annuity. But also remember regardless of whether you select the lump sum or the cash, your first telephone call should not be to the lottery officials or even your spouse, but to your lawyer! I hope I bring you some good luck.

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