In our last post, we took a look at the Intentionally Defective Grantor Trust as a technique for minimizing estate and gift taxes. Another technique, also trust-based, is the Grantor Retained Annuity Trust (GRAT). GRATs can allow those who establish them to transfer a significant number of assets with minimal or no estate and gift tax.
GRATs are essentially trusts to which assets are transferred in exchange for an annuity which yields a periodic return on the assets, along with interest. The return from a GRAT lasts as long as the duration of the trust. The trust’s duration may be as little as two years.
A GRAT can be structured so that the present value of the future annuity payments matches the value of the asset placed in the trust. This approach would result in no taxable gift, as so is often referred to as a “zeroed-out GRAT.”
The risks of establishing GRAT are low, but tax laws and regulations need to be followed. At present, the benefits of including a GRAT in one’s estate plan are significant, since current interest rates are low and real property values are depressed. This means now is a great opportunity to think about these estate planning tools.
In addition, the effectiveness and flexibility of GRATs may soon be compromised as a result of the Obama administrations’ new budget proposal. It isn’t yet clear what exactly will take place with the budget, but given all these factors, a GRAT may be well worth considering.
Source: Forbes, “Estate and Gift Tax Considerations for 2012: IDGTs-And you Must Act Now!,” Rob Clarfeld, February 22, 2012.