Estate taxes are an important item to consider for people with sizable estates. There are several tools available to minimize the estate tax burden. In this report, Darra Rayndon, a member of Clark Hill PLC, Scottsdale, Arizona, explains how GRATs can help reduce estate tax liability.
Rayndon explains that a GRAT is a tool used for estates that have rapidly appreciating assets. A GRAT is a grantor retained annuity trust. This is a trust to which the grantor contributes assets that will be appreciating rapidly in the future. The trust is set up to pay an annuity to the beneficiary for a term of years, perhaps five years, perhaps more. The gift tax liability of the transfer is measured by the term of the trust and the value of what the beneficiary would receive measured at today’s values. In other words, there is a discount for the contribution, and that is its appeal in estate planning.
In addition, the grantor will receive a stream of income from the GRAT. However, all income earned by the trust property and all appreciation of the assets will be outside the estate of the grantor.
The beneficiary of GRAT may be any of several possibilities. It can be one or more family members. Other individuals may be beneficiaries, and other trusts may also be named as beneficiaries. A limited liability company can even be a beneficiary.
Rayndon points out that the gift tax and generation-skipping transfer tax exemptions don’t apply to GRATs. However, the grantor can take advantage of the gift tax exemption, which is currently $5,450,000 per person, assuming that there is a taxable gift involved.
Rayndon also notes that a GRAT is an irrevocable trust. This means that it should be done carefully when it is done so that everything goes as anticipated and that the assets pass to the named beneficiaries at the end of the trust term. Another advantage is that creditors cannot get at the assets in the GRAT.
The people who will be interested in GRATs are those with taxable estates. The current amounts are $5,450.000 for an individual or 10,900,000 for a married couple. Using current figures, property that will appreciate more than 1.4% would be good property to put into a GRAT.
Darra L. Rayndon, a Member in Clark Hill’s Estate Planning & Probate Practice Group, has over thirty years of practice experience and is certified as a tax specialist by the Arizona Bar. Darra’s work includes tax planning, business entity formation and representation including corporations, partnerships, limited liability companies, and other businesses, estate and wealth succession planning, asset protection, exempt private offerings, and real estate matters. She is also a Certified Fiduciary through the Arizona Supreme Court, and as such, serves as trustee and in other fiduciary capacities when called upon. The Legal Broadcast Network is a featured network of Sequence Media Group.