Grantor Retained Annuity Trust (GRAT)

Estate Planning Opportunity: Grantor Retained Annuity Trust (GRAT)

In normal times, estate planning is viewed by many as important, but not urgent. But as both September 11th and the 2008 financial crisis proved, families who calmly undertake meaningful steps toward estate tax reduction during such times can secure disproportionate tax savings from which their future generations benefit immensely.

For individuals looking to transfer wealth to family members during the current coronavirus pandemic, there are notable opportunities to take advantage of.

Why Right Now?

The COVID-19 crisis has driven gift interest rates even lower than recent historic lows — with the Section 7520 rate set by the IRS reaching a remarkable low of 0.8% in May 2020.

Across the board, asset values have diminished but could respond soon to the unprecedented financial stimulus anticipated this quarter. The sizeable reduction in gift interest rates and asset values combine for powerful wealth transfer strategies and techniques, each of which may greatly mitigate estate tax, offer asset protection and numerous other benefits to families.

One such method for maximizing opportunity is a grantor retained annuity trust (GRAT).

Opportunity Method: GRAT

A GRAT is an irrevocable gifting trust that can make for a compelling estate planning tool for those looking to pass significant wealth to the next generation with little or no wealth erosion nor gift and estate tax cost.

In a GRAT, individuals can transfer property to a trust, but retain a right to annuity payments for a specified number of years. After the trust term ends, the annuity payments stop, and the remaining trust property passes to the trust’s beneficiaries. If the rate of appreciation is greater than the IRS interest rate, a higher value of trust assets escapes gift and estate taxation. Consequently, the lower the IRS interest rate, the more effective this technique can be.

Needless to say, with a historically low gift interest rate, a GRAT with a moderate trust term (e.g. 5-7 years) allows plenty of time for the growth on the gifted assets to easily exceed an annual 0.8% rate, resulting in what is essentially a tax-free wealth transfer.

Considerations

A GRAT is not without risk, including the risk that the individual may not outlive the annuity term. If an individual dies during the GRAT term, the property in the trust will be included in the gross estate for federal estate tax purposes and the advantages of the GRAT will be lost. Because of this, one may wish to consider a shorter-term GRAT rather than one with a longer term.

There are a wide variety of GRAT strategies as well as other considerations to keep in mind. We’d be happy to discuss your estate concerns and objectives and help you determine the best approach for your family. Our team of very experienced CFPs will stress-test the impact of any estate strategy, providing your family with financial clarity during a stressful time so you can confidently act sooner rather than later.

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Solutions for Estate and Gift Planning

Jeffrey Arsenault

Jeffrey Arsenault

CPA/PFS, MST, CFP®, RLP®
Partner

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