Legal Definitions - private annuity

A private annuity is a financial arrangement where an individual, known as the annuitant, transfers ownership of an asset (such as real estate, a business, or investments) to another person or entity, called the obligor. In return, the obligor promises to make regular payments to the annuitant for the rest of the annuitant's life.

The key characteristic that makes it "private" is that the obligor is not a commercial insurance company or financial institution that regularly sells annuities to the public. Instead, these agreements are typically made between individuals, often family members, or between an individual and a private organization.

Here are some examples to illustrate how a private annuity works:

• Example 1: Family Business Succession

  Ms. Eleanor Vance, an 80-year-old entrepreneur, owns a successful small manufacturing company. She wants to retire and pass the business to her grandson, Michael, who has worked alongside her for many years. Instead of an outright gift or sale, Ms. Vance transfers the full ownership of the company to Michael. In exchange, Michael agrees to pay Ms. Vance a fixed monthly sum for the remainder of her life, funded by the business's ongoing profits. This is a private annuity because Michael, the obligor, is not in the business of selling annuities; he is a family member taking over the business and personally committing to the payments.

• Example 2: Transfer of a Vacation Property

  Mr. David Lee, a widower, owns a cherished vacation cottage that he wants to ensure remains with his close friend, Sarah, who has always loved the property and helped maintain it. Mr. Lee transfers the deed to the cottage to Sarah. In return, Sarah agrees to pay Mr. Lee a set amount every quarter for as long as he lives. This arrangement allows Mr. Lee to receive a steady income while ensuring the property goes to someone he trusts. Sarah is the obligor, and since she is not a professional annuity provider, this constitutes a private annuity.

• Example 3: Supporting a Charitable Foundation

  Dr. Anya Sharma, a retired university professor, wishes to provide long-term support to a small, local educational foundation she helped establish. She transfers a significant portfolio of stocks and bonds to the foundation. In exchange, the foundation's board agrees to pay Dr. Sharma a regular income stream for the rest of her life, using the returns generated from the investment portfolio. Here, Dr. Sharma is the annuitant, and the educational foundation is the obligor. Because the foundation is not a commercial entity selling annuities, this is a private annuity arrangement that benefits both Dr. Sharma and the foundation.