Transferring Wealth to Heirs Free of Estate and Gift Taxes

(Now may be the Ideal Time to Use a Grantor Retained Annuity Trust)

August 2012

A Grantor Retained Annuity Trust (GRAT) is a vehicle used to preserve family wealth by reducing estate and gift taxes on transfer of assets to family members during the taxpayer’s life.  The interest rate applicable in determining the amount of the reportable gift using a GRAT is at an astonishingly low 1% through September 30, 2012.  The rate changes monthly and whether this rate will remain as low as 1% going forward is uncertain.  Moreover, if the Obama 2013 Budget proposals are put into effect, the use of GRATS may be curtailed as early as next year.  Given these circumstances, now is the ideal time to consider use of this tool to transfer wealth.

GRATs are relatively straightforward to set up and administer.  An irrevocable trust is funded by the taxpayer using assets, such as publicly-traded stock or shares in a closely-held business.  Income in the form of an annuity is paid from the new GRAT back to the taxpayer who created the trust over a specified time period—usually two, three, or five years.  All taxable income within the trust is reportable by the taxpayer who created it during the term of the trust.  At the end of the trust period the assets remaining in the trust after the annuity payments have been made are distributed to the named heirs free of gift and estate tax.  The size of the benefit depends on how much the actual income and appreciation of the assets within the GRAT exceeds the IRS interest rate during the term of the trust.  Since the IRS rate is at a low 1%, there is a potential to transfer significant wealth free of gift and estate tax.

We like GRATs because they are established tools, and are efficient to create and run.  Although the creator of the GRAT must outlive the selected term for optimal benefit, there’s little down side to a GRAT if the person dies while the GRAT is still operative.  Finally, note that the use of a GRAT with closely held businesses will require an independent appraisal of the value of the business stock as well as funding with some more liquid assets. 

If you are interested in learning more about how setting up a GRAT could help you to plan for transfer of wealth without incurring additional gift and estate tax, please call your BNN advisor at 1.800.244.7444.

Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.

Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any tax-related matter.  Please contact us if you wish to have formal written advice on this matter.