Grantor Retained Annuity Trust
On behalf of David Whitlock at Whitlock Canter LLC
An Estate Planning Technique from our Paramus Law Firm
A Grantor Retained Annuity Trust (“GRAT”) is a sophisticated estate planning technique that can be used to transfer valuable assets to family members at reduced values. The Client transfers his or her assets to an irrevocable GRAT, reserving an annual annuity from the Trust (e.g. 10%) for a fixed period of time (e.g. 10 years). After the GRAT term expires, the assets can either be turned over to the GRAT beneficiaries outright or can be held for the beneficiaries in further trust. The retained annual annuity is based upon a percentage of the value of the assets transferred to the GRAT on the date the GRAT is created.
The value of the gift to a GRAT for federal gift tax purposes is based upon the value of the assets transferred to the trust less the value of the annuity retained by the Client. If assets placed in the GRAT are expected to appreciate faster than the assumed IRS interest rate (5.8% as of October 2006), the GRAT technique will be successful. The GRAT technique is more beneficial if the assets placed in the GRAT are eligible for appropriate valuation discounts, such as minority interests in closely held businesses or family limited partnership interests. Family businesses operated as an “S” corporation are especially suitable for the GRAT technique because the cash flow from the business that would have otherwise been distributed to the older generation can be restructured as an annuity payment from the GRAT.
“Zeroed-Out GRATs” are a popular technique in large estates. Zeroed-out GRATs are GRATs which are structured with such a large annuity payout that the value of the gift for federal gift tax purposes is close to zero. If the assets given to the GRAT appreciate, the appreciation is removed from the Client’s estate. If the assets do not appreciate, nothing is gained, but nothing is lost either. The “Zeroed-Out GRAT” technique is like flipping a coin and if the coin “comes up heads” the Client wins, and if it “comes up tails” it is a tie.
Whitlock Canter LLC has the expertise to structure GRATs with a decided advantage in succeeding in reducing the Client’s estate for estate tax purposes.