Grantor Retained Annuity Trusts
January 2009
A GRAT allows you to freeze the value of your
assets, avoid estate tax, and give your kids the benefit
In a weak economy, with depressed asset values, a
grantor retained annuity trust (GRAT) allows you to avoid gift tax consequences
while temporarily freezing the value of assets that will be worth more later.
The asset can be shares in a company that is likely to go public, or beaten down
shares of stock that are likely to appreciate. Like loans, GRATs mature within a
specified number of years, and, when the trust expires, you get back any money
you put in.
How Does It Work? A GRAT is an irrevocable trust that can be designed in a
variety of ways to benefit you and your family. In general, it involves
transferring an asset, such as stock, with a retained right to receive fixed
income, at least annually. The GRAT permits the value of the grantor's retained
interest to be subtracted from the value of the property transferred in order to
arrive at a net gift amount.
While it can be structured in many creative ways, it is typically used as
follows:
-
The grantor has an asset that he believes will appreciate and that he wants to
remove from his estate for tax purposes. (With stocks and real estate values at
a low level, this is a powerful tool, assuming the grantor believes that values
will appreciate.)
-
The grantor receives a defined income stream, which reduces the value of the
principle.
-
The beneficiaries receive the appreciation, whatever that may be.
For example, Dad places $500,000 of company stock into a GRAT. He receives a
certain sum in income, pays tax on it, but allows all of the stock's
appreciation to transfer to his children, gift-tax free.
What Are the Benefits? There are many non-tax benefits to a GRAT as well. For
example, if you want a specific asset to go to one child over another, or if you
don't want a former spouse or creditor who might contest your will to obtain it,
a GRAT makes it less likely that the asset will be lost if the estate is
embroiled in a lawsuit.
Be aware that if you die before the trust ends, then it's as if the GRAT never
existed. The trust's entire value including its returns will be included in
your estate and subject to estate tax.
Another good planning approach is to create separate GRATs for each asset. If
you combine two or more unstable assets into one GRAT, then the losses on one
might offset the gains in another.
A well-designed GRAT is a powerful way to avoid gift tax consequences while
providing your family with a significant portion of an asset's income.
Adapted from the Daily Plan-It newsletter. Hoopes,
Adams & Alexander, PLC, is a Chandler, Arizona, law firm offering services to
Phoenix-area clients in the areas of estate planning, entity formation,
commercial and real estate transactions, and civil litigation. |
