Making Use of GRATS Before It’s Too Late

The IRS recently announced its intent to publish Revenue Ruling 2011-13 which provides various prescribed interest rates for June 2011 for federal income, estate, and gift tax purposes. According to the IRS, the June section 7520 rate will be 2.8%. The reason this rate is relevant is because it serves as a reminder of the importance of establishing a Grantor Retained Annuity Trust (GRAT) now, while interest rates are low and the opportunity is still available.

Section 7520 Rate RisingA GRAT is an estate planning technique based primarily on interest rate assumptions. It begins with the formation of a trust that typically exists for a specific term of years. The GRAT is funded using assets that are likely to earn more than the IRS’s measuring standard (for GRATs established in June, the 2.8% section 7520 interest rate described above) during the GRAT term in an effort to pass the appreciation in those assets to the beneficiaries of the trust free of gift and estate tax. Essentially, the GRAT mechanism allows growth and income above the 2.8% interest rate to pass estate tax free.

It is not difficult to see the benefit of establishing a GRAT to provide appreciable property to your loved ones without the hindrance of estate taxes. Using the June interest rate as an example, practically any asset that returns more than 2.8% could be placed in a GRAT and the appreciation that asset earned would pass to another with minimal tax consequences.

A properly designed GRAT is an incredibly potent estate planning tool that can relieve an individual and their estate of the onerous burden of hefty gift or estate taxes. So what’s the problem? For one thing, they may not be around much longer. Congress has been debating the idea of ending or substantially hindering the GRAT as an effective method of estate tax planning for a while now and with the great deficit debate raging on it seems inevitable that some form of GRAT-limiting legislation will eventually find its way through Congress and onto the President’s desk. That is why it is important to take advantage of this opportunity now, before the GRAT as we know it ceases to exist.

If you are interested in learning more about GRATs and how they can benefit your estate plan, contact Ourednik Law Offices and speak with on of our experienced tax attorneys today.