How Are Monies Invested Within a PAT?

This is one of the most frequently asked questions of those considering the Private Annuity Trust. As with almost all things financial, there is no one single right answer.

For instance, if you attend a seminar presentation sponsored by persons wearing thousand dollar suits, you may hear that your funds should be in stocks, bonds, mutual funds, etc. where they project double digit annual increases by taking advantage of their financial prowess.

This often sounds tempting, as of course, you want your funds to grow by leaps and bounds. These advisors also want to have your money to actively manage, as they earn their living from management fees and commissions.

If you are young enough, and have some funds you want to allocate to more volatile investments with the possibility of large returns, this strategy can sometimes do well for you over time.

It is the opinion of this author that the Private Annuity Trust is not the correct vehicle for investments that can lose principle. It is the trustee who has the fiduciary responsibility to invest the funds so that the trust can provide the required payments to the annuitant for the entire amount of time the trust has been established for. This is their only obligation and it should be taken seriously.

What many do not realize, is that the payments the annuitant receives are based on the Federal Mid-Term Rate in force in the month the trust is established. They are fixed once they begin, and remain so throughout the life of the trust.

So, even if the trust made 20% every year, the payments to the annuitant do not change. The extra monies remain in the trust to either continue payments past the normal end of the trust (such as if you outlive your IRS life expectancy), or pass to your heirs upon your death.

If your trust loses large sums of money while invested in volatile investments, it is very possible that the trust will run out of funds before completing its obligated series of payments. This means money you are counting on to live on is no longer available. Many people fear outliving their money, and chances are there is little chance to replace this income in later life.

If the trust is burdened by heavy money management fees and its own annual tax burden if the funds earn taxable annual income, this can dilute the earnings as well.

So, there are very good reasons commercial annuities from A rated insurance carriers make sense within a PAT.

1. Tax deferred income within the trust. The trust itself does not have annual taxable income.

2. The principle is protected from loss and insured by the reserves from the insurance company.

3. Annual management fees are kept to a minimum, as is administrative accounting.

4. Historical rates of return support the current FMT rates over time.

It's not to say that a few other types of investments don't have their place according to the age of annuitant, other outside holdings, deposit amount, proportion and circumstance. But, the key word that should be associated with the placement of funds within the Private Annuity Trust is "Prudent".

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