miniature human standing in a piled of coins

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 remainder 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.

Reference: ThinkAdvisor (July 29, 2013) The Clock Is Ticking on GRATs

For more information on tax planning, please visit my estate planning website.

Mr. Amoruso concentrates his practice on Elder Law, Comprehensive Estate Planning, Asset Preservation, Estate Administration and Guardianship.