GRAT Can Enable Tax-Free Asset Transfer

A little bit of common sense will get you a long way, and with this in mind a sensible reaction to the estate tax would be to give gifts to those who would otherwise be inheriting these assets while you are still alive. This is easier said than done because there is a gift tax in place with the same 35% rate as the estate tax.

It should be mentioned that there is a $5 million lifetime gift tax exemption, but it does not help at all if you’re looking for estate tax efficiency because it is unified with the estate tax exclusion. This means that if you were to give, for example, $3 million in gifts using this exemption you would only have $2 million left to utilize as an estate tax buffer.

Estate planning attorneys do have some tools available to them that can be utilized to transfer assets in a tax-free manner. One of these revolves around the creation of a grantor retained annuity trust or GRAT. To employ this strategy you fund the trust, set a trust term, and name a beneficiary. The act of funding the trust is considered to be a taxable gift by the IRS and they calculate normal appreciation utilizing 120% of the federal midterm rate that was current during the month of the trust‘s creation.

During the term of the trust you receive annuity payments, and this strategy involves “zeroing out” the GRAT. So, you arrange for the annuity payments to equal the entire taxable value of the trust over the course of its term. By doing this you retain all of the interest in the trust, thus you are not exposed to any gift tax liability.

The initial objective is to fund the trusts with assets that you would expect to appreciate considerably. If these assets did indeed appreciate beyond the original IRS valuation at the end of the trust term your beneficiary would assume ownership of the remainder and the gift tax would not be applicable.

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Paul Gantner

I am an owner of Amen, Gantner & Capriano, Your Estate Matters, L.L.C. I have been able to bring my business and legal education and experience into a firm that has for many years provided comprehensive estate plans that meet clients’ needs and expectations.My passion has been creating and constantly pushing AGC’s mission of “Helping Families Secure their Legacies by Embracing them into the Law Firm Family through Long-term, Personal Advisory Relationships.”

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