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Grantor Retained Annuity Trusts: an effective tax minimization tool

One of the many estate planning tools available, a Grantor Retained Annuity Trust (GRAT) is a trust to which assets are transferred for a retained annuity, which is a periodic return of the assets with interest. In a GRAT, this return lasts as long as the trust’s duration. These estate planning tools can allow for significant asset transfers to family and other loved ones with minimal or no gift tax consequences.

Although the GRAT has been around for awhile by statute, the Obama administration proposed in its recent budget proposal provisions which would reduce the effectiveness and flexibility of these estate planning tools. For that reasons, it is a good idea to look into whether this tool may fit within your estate plan.

The GRAT, in its simplest form, is a short-term trust through which assets are transferred in exchange for an annuity for the term of the trust. The trust duration may be as short as two years.

GRATs can be structured in such a way that the present value of the future annuity payments is equal to the valuation of the assets initially placed in the trust. Because this setup results in no taxable gift, it is often called a “zeroed-out GRAT.”

The benefits of GRATs as estate planning tools are, at this time, even greater because of the combination of low interest rates and depressed asset values.

The risk associated with placing assets in a GRAT is very low, provided tax laws and regulations are followed carefully. Obviously, having an experienced estate planning attorney is critical for optimal use of this estate planning tool.

The bottom with GRATs is that they can be a very effective tax minimization tool. Because their effectiveness may be harmed by the president’s proposed law, it may be the perfect time to insert one into your estate plan.

Source: Forbes, “Estate and Gift Tax Considerations for 2012: IDGTs-And you Must Act Now!,” Rob Clarfeld, February 22, 2012.