Property owners told to be wary of annuities
June 3, 2012 by Burton Speakman
Saturday, June 2, 2012
Those who have received oil and gas lease payments throughout the Valley are being contacted about an investment plan that local attorneys believe could be hazardous.
There have been multiple groups pushing annuities to people who have received lease payments, said George Millich, a Youngstown attorney with Harrington, Hoppe & Mitchell, LTD.
“They refer to an IRS form from 1968 that includes language they’re basing their assumptions on,” Millich said. “They don’t have the IRS blessing.”
The companies calling are telling people these structured payments are done in a way that will delay their tax burden. There are even some IRS rulings that can be used to attack the annuity claim, he said.
It does not matter if the lease holder receives a lump sum or a series of payments in terms of tax liability, Millich said.
The plan also has substantial risk. The person who is paid the lease has to provide his or her money to a third party who is overseas to prevent that company from having to pay taxes, he said.
“These people are taking a bare-bones promise that the third party will pay,” Millich said.
In addition, many of the local lease payments are for smaller amounts. If a person does not make that much money and his or her lease payment is $20,000 to $25,000, then the tax liability will not be high and any type of annuity payment would be very low, he said.
“They always couch their pitch with ‘talk to your counsel.’ But then they get upset when I tell clients I don’t think it would work,” Millich said. “I get a lot of angry calls from the people who promote these things.”
Eric Johnson, a Canfield attorney who deals solely in oil and gas issues, said several of his clients have contacted him asking questions about annuities.
There is the possibility that if the plan is taken to court and loses, the individual will not have the money to pay the tax bill. For an annuity, the money has to be placed in a way so the owner does not have access to it, he said. If the IRS came to the individual demanding payment and interest, they would not be able to use the lump-sum payments they received to make restitution.
“If this would work, why did it take 44 years for somebody to come up with it?” Johnson said. “Are the rest of the investment companies, CPAs and tax attorneys so stupid they couldn’t come up with it?”
Johnson said he recently spoke with a group of attorneys in southern Ohio about oil and gas issues, and all of them were skeptical that annuities would help people who receive lump payments for oil and gas leases to defer their tax payments.
“When I first saw this, I thought immediately it wouldn’t pass muster,” he said. “I couldn’t find one single case that showed it would work.”
There are other tax options available to lease recipients such as setting up a Roth IRA, Millich said. They also could reinvest the money into their farm. None of these measures, however, will reduce tax burdens on the initial payment.
There is not any sort of approach to investment that works in all situations, said Frank Hierro, president of Huntington Bank’s Mahoning Valley region.
“Annuities can be good under certain circumstances,” he said.
Huntington generally would not consider annuities to be the best approach for investment for people receiving a lump-sum payment, Hierro said.
Individuals who receive lump-sum payments and want to invest should take their time to make a decision on how they will invest and plan for taxes. They owe it to themselves to look for investment advice from someone with a long history of success, he said.
Structured payments, such as annuities, are good for the companies that organize them because of the fees they collect. They just do not appear to be good for the people who have received lease payments, Millich said.