Hypothetical tax queston

Andy asks:

Let us assume that a motion picture company offers me a salary of one million dollars to perform in a film.

I tell them " Instead of giving me one million dollars, just set up an annuity that pays me five thousand dollars a month for the rest of my life... (assuming that the present value of that annuity is one million )

Ok, what is the tax liability . Is it

1) Tax is due immediately on the value of the annuity, which I would have received no money and would be unable to pay ??

or

2) Tax is due on the income from the annuity, as the money is received ???

Thanks for any discussion on this....

Andy

Reply to
AndyS
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The answer to your hypothetical question is, it depends.

More specifically, but not specifically enough to be very useful, it depends upon facts you did not provide (or create) for your hypothetical scenario.

Reply to
Bill Brown

In order to avoid having to include the whole amount in income under the economic benefit theory doctrine, the employer would have to set up a "rabbi trust". This is a form of a nonqualified deferred comp plan that is funded (most nonqualified deferred comp plans are unfunded in order to avoid immediate taxation) but the plan must specify that the assets in the plan are available to the employer's creditors.

There is a lot of information available on the internet about this. Use any search engine to look for "rabbi trust".

Reply to
Alan

"AndyS" wrote

If you own and control the annuity and can pick the time and amount of the disbursements, then it's all income in year 1.

If they own and control the annuity, and can cease payment at any time, then it's income to you as you receive it.

Reply to
paulthomascpa

Andy comments: Thanks, Alan. That was exactly the info I needed to understand this item.... There's lots of info on google about "rabbi trust", but this is the first time I have ever seen the term, and didn't know to look for it...

Andy in Eureka, Texas

Reply to
AndyS

My understanding is that if there is a contract entered into before the money is earned, calling for distributions over a period of years, and the recipient has no right to accelerate the payments, they are taxed when received, even if the agreement could have called for all the payments to be received within one tax year.

Reply to
Stuart A. Bronstein

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