Clients
with swiftly appreciating assets can transfer these assets and escape both gift
and estate taxation on almost all of the appreciation using a combination
GRAT-life insurance strategy in connection with the steep gift tax valuation
discount available today. Despite this, the Administration has often threatened
to eliminate the tax benefits that can be realized using a GRAT strategy, so
the time for clients to lock in these tax savings is today.
The law and the market
conditions that give Grantor Retained Annuity Trusts (GRATs) their power are
still favorable. However, as a recent ThinkAdvisor
article warns, “The Clock Is Ticking on GRATs.” So get your GRATs while you can, you
never know when time will run out on this nifty tool.
These past few years have been a
perfect time for estate tax planning with GRATs. They thrive in a low interest
rate environment where so many other plans languish. Briefly, the GRAT works by
allowing the grantor to put assets into the trust which then continues to
provide regular annuity payments to the grantor for life or for a term of
years. Eventually, at the expiration of those annuity payments, the remainder
interest in the GRAT passes to the trust beneficiaries.
The taxable gift value of the
reminder interest is determined, in part, by the current month’s “applicable
federal (interest) rate” (or either of the previous two months, if lower) for
the month the trust is funded. Accordingly, a great time to implement a GRAT is
when such interest rates are low (and especially if the rate is expected to
climb). The value of the assets in the trust simply needs to outperform the low
rate you have locked in for the maximum benefit.
While there are many complicated
ways to make a GRAT do even more wonders, especially for highly appreciated
assets, but there are at least two easy ways to ruin them.
First, do not die. Seriously,
the grantor must outlive the annuity term of the trust. Until the annuity term
ends, the assets are “grantor retained” and will wind up counting as part of
the grantor’s estate and taxed as such. For this reason GRATs are commonly
created with a shorter term than the life expectancy of the grantor.
Second, do not procrastinate. As
long as there is a sitting Congress and a president in the White House, no tax
planning is safe. In fact, more than a few proposals have been advanced to
limit GRATs. Even though existing GRATs almost certainly would be
grandfathered, why take that risk?
Bottom line: If you are
considering a GRAT, this may be the perfect window to proceed in earnest.
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Reference: ThinkAdvisor
(July 29, 2013) “The Clock Is Ticking on GRATs”