You're welcome and thanks for following up. It's going to depend upon their marginal income tax
For 2013, the tax laws
of long term capital gains are as follows:
0% applies to long-term gains and dividend income if a person is in the 10% and 15% tax brackets,
15% applies to long-term gains and dividend income if a person is in the 25%, 28%, 33%, or 35% tax brackets, and
20% applies to long-term gains and dividend income if a person is in the 39.6% tax bracket.
In addition, starting in 2013, capital gain income will be subject to an additional 3.8% Medicare
tax for taxpayers with income at or above a certain threshold. This 3.8% Medicare surtax applies to taxpayers with “net investment income” in excess of threshold income amounts of $200,000 for single filers and $250,000 for married couples filing jointly.
With the annuity, the gain is the sale price based on the annuity contract's current FMV at the time of its purchase less their basis. with the sale for the note, they could take advantage of the installment sale rules
and report the gain over time as they receive note payments.