With interest rates continuing to hold at near record lows, now is the time to consider adding a GRAT to an estate plan. A Grantor Retained Annuity Trust (GRAT) is an estate planning technique based primarily on interest rate assumptions. It utilizes a trust that is set to exist for a specific number of years and then terminate when the term ends. The GRAT is funded using assets that are considered likely to appreciate in value at a rate greater than that projected by the IRS, which for GRATs established in December is 1.6%. Essentially, the GRAT mechanism allows capital growth and income above the 1.6% interest rate to pass to the beneficiary with minimal gift or estate tax consequences. The biggest hazards to the GRAT structure are (1) the grantor may die before the GRAT term expires and then the trust assets will be included in the grantor’s estate; or (2) the assets do not appreciate enough in value to make the transaction effective. With respect to (2), the current low interest rate environment makes this undesirable outcome far less likely.
One popular technique utilized by tax and estate planning attorneys which helps to eliminate the above-described hazards is the so-called “laddered GRAT.” Generally, a laddered GRAT is a scenario where multiple GRATs are created with increasingly lengthening terms (e.g., first one GRAT with a two-year term, then another with four-year term, then another with a six-year term, and so on), with each GRAT being funded with a portion of the assets the grantor wishes to transfer. Each time the grantor survives the term of a trust, the trust terminates and its assets are removed from the grantor’s estate. When additional time passes and the grantor survives the next trust, this in turn gets removed from the estate, and so forth. The GRAT with the shortest term will usually transfer the least amount of value to the beneficiary and the GRAT with the longest term will usually transfer the most. Thus, if the grantor dies somewhere in the middle of the process, they have a better chance of getting more assets out of their estate and more value to the beneficiary than if they had established either a single short-term GRAT (in which case they would be unable to pass much value) or died before the termination of a single long-term GRAT (in which case the full value of the GRAT would be included in the grantor’s estate).
The reason GRATs are important now is because tried-and-true techniques such as the laddered GRAT may not be around much longer. President Obama has proposed, and Congress has debated, the idea of ending or substantially hindering the GRAT for quite some time now. The most common proposal is that of restricting the term of GRATs to a period that is much longer than currently possible, such as ten years or more. However, the ultimate outcome at this point is anyone’s guess. One thing seems certain, anytime you hear the politicians in Washington talking about “tax reform,” there is a good possibility that current GRAT planning techniques, like laddered GRATs, may be on the chopping block.
A properly designed GRAT is an incredibly potent planning tool that can relieve an individual and their estate of the onerous burden of hefty gift or estate taxes. Establishing one or more GRATs requires the assistance of an experienced estate planning attorney with knowledge in tax matters. If you are interested in adding some GRATs to your end-of-the-year tax planning, contact an Attorney in Jacksonville who can assist you today.