A person creates a Grantor Retained Annuity Trust (GRAT) by transferring assets to an irrevocable trust for the benefit of a beneficiary and retains an annuity interest.
A person who establishes a GRAT receives an annuity for a set term, as little as two years. Any balance remaining after the annuity is paid goes to whomever the grantor named as a beneficiary when the trust was established, typically a family member. The value of the remainder interest is a taxable gift when the GRAT is created.
However, the GRAT can be structured in a manner such that the present value of the annuity the grantor receives is equal to the value of the assets placed into the trust, so the gift tax value of the remainder is zero.
If the trust’s assets appreciate by more than the IRS Adjusted Federal Rate (AFR), which are very low, the beneficiaries get the excess and the grantor does not owe any gift tax on the amount transferred to the beneficiary. However, if the assets decline in value, the beneficiaries do not receive anything. If the grantor dies during the GRAT’s term, the assets are included in the grantor’s estate. The potential estate tax savings can be huge if the GRAT’s assets appreciate significantly.
Treasury has proposed legislation to require a GRAT have a term of at least ten years. This longer term would level stock market performance and increase the likelihood the grantor will die during the term.
The time is now to consider this planning technique that has very significant savings opportunities.