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Maximize Estate Tax Savings with GRATs

Posted Monday, August 8, 2011 by Ronald L. Bueing and Michael A. Larson

alt text President Obama’s 2012 budget, while nowhere close to law, does indicate areas of estate tax planning that taxpayers should consider using before they are restricted. One of these techniques is grantor annuity trusts or GRATs. Obama would place restrictions on the use of GRATs beginning in 2012, including the requirement of a 10 year minimum term and a remainder value in excess of -0-.

The GRAT allows taxpayers to transfer assets while retaining an income annuity. The grantor receives a fixed annuity for a specified term and the beneficiaries receive the remaining principal at the end of the annuity term. The gift, determined at the time that the GRAT is established, is the theoretical remainder of the trust calculated using a statutory interest rate, which is at historically low interest rates in the current economy. As long as the trust assets increase in value at a rate in excess of the statutory rate, the excess is transferred to heirs with no gift tax.

alt textA popular form of the GRAT is a “zeroed out” GRAT. The GRAT is structured so that the remainder interest transferred to the beneficiaries is valued at -0-, incurring no gift tax. If the appreciation in value of the trust assets exceeds the statutory rate, which is currently set at 2.2% for August of 2011,the excess appreciation can be transferred to heirs free of gift tax. Given the recent downturn in the stock market, persons who expect a recovery in market prices in future years could transfer significant asset appreciation with no gift tax. Meanwhile, if the appreciation is not realized there is virtually no risk to the grantor, due to the lack of a gift tax at the establishment of the GRAT.

If you are interested in learning more about the use of GRATs in estate planning, contact Ron Bueing or Mike Larson for more information.

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