If you are fortunate enough to have accrued an estate that is significantly valuable you likely already know that careful estate planning is crucial. Passing down the assets in your estate without losing a significant portion of the value of those assets is the challenge. For anyone with valuable estate assets, knowing how to transfer appreciable assets at a discount is one key to a successful estate plan. One commonly used estate planning tool for accomplishing just that is the Grantor Retained Annuity Trust, or GRAT. Because a GRAT is a complex type of trust it is imperative that you consult with your Missouri estate planning attorney to decide if a GRAT is right for your purposes; however, understanding the basic concept of a GRAT is a good place to start.
As you undoubtedly already know, the combined value of the assets owned by you at the time of your death and the value of any gifts made during your lifetime is potentially subject to federal gift and estate tax. Each taxpayer is entitled to exempt up to the lifetime exemption limit which was permanently set at $5 million in the American Taxpayer Relief Act of 2012. The lifetime limit is adjusted each year for inflation, making it $5.45 million for 2016. The value of estate assets that exceed the lifetime limit are taxed at a rate of 40 percent, giving taxpayers ample incentive to use all available tools to limit their gift and estate tax exposure. For assets that are likely to appreciate, such as real property or securities, a GRAT is often the answer.
A GRAT is a specialized type of trust that works as follows. As the Grantor, you create the trust for a specific term and fund it with highly appreciable assets, naming a beneficiary who will receive the remainder of the assets at the end of the trust term. Typically, the beneficiary is an adult child or grandchild. Because the trust contemplates a remainder, the IRS determines the taxable value of the trust by adding the hurdle rate to account for anticipated interest accrual. You will then receive annual annuity payments from the trust. The goal is to “zero out” the GRAT, leaving nothing of the taxable value of the trust in the trust at the end of the trust term. Assuming that the trust assets appreciate at a higher rate than the IRS calculated, there will be a remainder in the trust at the trust termination. That remainder will be transferred to the beneficiary tax-free.
One risk, however, with a GRAT is that the Grantor of the trust must outlive the trust term for the strategy to work. If the Grantor dies before the end of the trust term the entire value of the trust assets become part of the Grantor’s estate and are, therefore, taxable.
If you have additional questions or concerns about a GRAT, contact the experienced Missouri estate planning attorneys at Amen, Gantner & Capriano, Your Estate Matters, LLC by calling (314) 966-8077 to schedule an appointment.