The GRAT or Grantor Retained Annuity Trust allows the transfer of assets, be it real estate, business interests, or other assets to an Irrevocable Trust. A person then receives an annuity payment from the Trust for a specific period of time, and at the end of that period, the Trust terminates, and the assets pass to the children, grandchildren, or other person who is named as the Trust Beneficiary.
There is probably more discussion about what a GRAT is than there are actual clients who execute this type of estate planning document. Since right now we are uncertain about the exact future of the federal estate taxes, including exemptions and rates, you may wish to be proactive and take advantage of benefits before the rules change. However, as oftentimes there are detriments where there are benefits, this is one of those situations where there is a significant benefit due to the very low interest rates as well as depressed values of assets.
When a transfer is made to a GRAT, a gift is made for gift tax purposes, but the person is not taxed on the present value of the annuity, since the Grantor who establishes the Trust is keeping those payments. The lifetime exclusion of $1 Million, (not $13,000.00 as most people believe,) is utilized to avoid or reduce the tax on the gift of the Trust remainder. Since this is a discounted amount, and it is based on interest rates and value of the assets, a significant portion of the assets may be transferred at this time at a much reduced value than they were a year or so ago. Since the annuity stream is based on the interest rates, that results in a lower taxable gift of the remainder, yet any future appreciation will not be subject to gift tax because the gift is made at the inception of the gift, not at the value of the gift when the trust terminates, hopefully having those assets appreciated.
If this becomes a bit more complicated than necessary or desired, then keep in mind that a person may still give up to $13,000.00 a year to as many different individuals as they want every year (this is the 2009 figure) without having to file a gift tax return. Any amount in excess of $13,000.00 per donee per year will require a gift tax return. But again, there is no gift tax due until the total value of all gifts exceeds $1,000,000.00 over the lifetime of the donor. In addition, please keep in mind that recipients of gifts do not pay income tax on their receipt of the gift.
by: Hyman G. Darling, Esq.
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