Individuals with taxable estates are always looking
for efficient ways to plan for the eventual estate tax. One such planning
technique is through a Grantor Retained Annuity Trust (GRAT).
A GRAT is a
trust by which the person making the contribution (the “grantor”) makes a
transfer of property to the trust and retains an annuity (equal to a fixed
percentage of the value of the initial trust assets) for a specified term of
years. At the end of the period, the remaining trust property transfers to the
beneficiaries which the grantor designates in the trust instrument.
For
gift tax purposes, the value of the gift by the grantor would equal the total
value of the assets transferred to the GRAT less the present value of the
grantor’s retained annuity payment for the period of time that the grantor
designates. The present value of an
annuity is based on the amount of the annuity selected, the initial term
selected, and the interest rate in effect for the month of the transfer
(determined by the IRS.). The trust
could be established to reduce the taxable gift to zero or close to zero (i.e.,
a “zeroed out” GRAT).
The benefit of the GRAT is that if the investment return of the GRAT
exceeds the interest rate used to determine the value of the grantor’s retained
interest and the grantor survives the GRAT term, the investment return in
excess of the interest rate will escape gift tax. The current interest rate set by the IRS. is 2.4%
(for August 2017). This interest rate is
relatively low by historical standards and makes the current time a good time
to utilize a zeroed out GRAT. Thus, the
GRAT is particularly beneficial where the assets transferred to the GRAT have
the potential to readily appreciate in value over the period of time
selected.
However, a disadvantage of a GRAT is that if the grantor fails to outlive
the term of the annuity, the remaining GRAT assets will be included in the
grantor’s estate for estate tax purposes, thereby eliminating some or all of
the potential estate planning benefits of the GRAT.
If you are looking for
creative and efficient ways to reduce your potential estate tax exposure,
please do not hesitate to contact Morris Law Group to discuss if a GRAT is the
right planning technique for you.
