GRATs Can Be Great for Utah’s High Net Worth Individuals

In a low interest rate environment, a grantor retained annuity trust (GRAT) can serve as a powerful estate planning tool to allow … high net worth [individuals] to transfer assets with minimal—and in some cases zero—tax liability.

GRATs are still pretty great, but we might have to act soon! The law and the market conditions that give Grantor Retained Annuity Trusts (GRATs) their power are still favorable. However, as a recent ThinkAdvisor article warns, “The Clock Is Ticking on GRATs.”

As we all know, since 2008, interest rates have been low to nonexistent.  These low interest rates provide  a perfect environment for estate tax planning with GRATs. They thrive in a low interest rate environment where so many other plans languish. Briefly, the GRAT works by allowing the grantor to put assets into the trust which then continues to provide regular annuity payments to the grantor for life or for a term of years. Eventually, at the expiration of those annuity payments, the remainder interest in the GRAT passes to the trust beneficiaries, ususally the beneficiaries of the Trustor.

The taxable gift value of the reminder interest is determined, in part, by the current month’s “applicable federal (interest) rate” (or either of the previous two months, if lower) for the month the trust is funded. Accordingly, a great time to implement a GRAT is when such interest rates are low (and especially if the rate is expected to climb). The value of the assets in the trust simply needs to outperform the low rate you have locked in for the maximum benefit.

While there are many complicated ways to make a GRAT do even more wonders, especially for highly appreciated assets, but there are at least two easy ways to ruin them.

First, do not die. Seriously, the grantor must outlive the annuity term of the trust. Until the annuity term ends, the assets are “grantor retained” and will wind up counting as part of the grantor’s estate and taxed as such. For this reason GRATs are commonly created with a shorter term than the life expectancy of the grantor.

Second, do not procrastinate. As long as there is a sitting Congress and a president in the White House, no tax planning is safe. In fact, more than a few proposals have been advanced to limit GRATs. Even though existing GRATs almost certainly would be grandfathered, why take that risk?

Bottom line: If you are considering a GRAT, this may be the perfect window to proceed in earnest.

Reference: ThinkAdvisor (July 29, 2013) “The Clock Is Ticking on GRATs”