It's A Great Time For GRATs!

Jonathan W Michael

On six separate occasions in 2010, Congress introduced legislation designed to curtail a very favorable estate planning technique called a “Grantor Retained Annuity Trust” or “GRAT.” Fortunately for taxpayers who wish to transfer assets to their children and grandchildren during their lifetimes, Congress was unable to eliminate this technique and GRATs continue to be very attractive wealth transfer tools, particularly in this current low interest rate environment.

A GRAT is an irrevocable trust that is designed to hold marketable securities, closely-held business interests, real estate or other property for the benefit of the individual who transfers the property into the trust (the “grantor”) for a set term of years. During the stated term the grantor is entitled to receive fixed annuity payments, which are typically expressed as a fixed percentage of the initial value of the property contributed to the GRAT. At the end of the stated term, the assets remaining in the GRAT, which typically reflect the growth and income on the initial contribution of property to the GRAT, will be distributed to the grantor’s children and grandchildren completely free of gift taxes.

By way of example, let’s assume that the grantor contributes $1 million of publicly traded stock to the GRAT, the grantor is 60 years old, the GRAT has a term of two years and the required minimum rate published by the Internal Revenue Service, which is now at historically favorable levels for taxpayers, is 2%. Let’s also assume that the stock appreciates in value at a rate of 6% each year. Upon the first and second anniversary of the GRAT, the grantor would receive an annuity payment of approximately $515,000. The balance of the assets remaining in the GRAT at the end of the second year (i.e., the income and appreciation in excess of the 2% published rate), or approximately $62,600, would be distributed to the grantor’s children and/or grandchildren completely free of gift taxes. Assuming the same facts as above and extending the term from two years to ten years, the annuity payments to the grantor would be $111,000 per year and the remainder available for distribution to the grantor’s children and/ or grandchildren would be $323,000.

We have found GRATs to be a very effective wealth transfer tool for clients owning assets that they believe are undervalued due to the current market conditions, clients with large concentrations of publicly traded securities or stock or other interests in closely-held businesses and for clients who have already utilized all or a significant portion of their $1 million “gift tax free” amount.

If you have questions about GRATs, please feel free to contact Jonathan W. Michael at 312/840-7049 or, or the other members of BWM&S’ Wealth & Succession Planning group.


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