Enhanced Opportunity for GRATs as a Powerful Estate Planning Technique

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Enhanced Opportunity for GRATs as a Powerful Estate Planning Technique

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Kristen Hosack Pace , Allison K. Pfeifle, Thomas W. Abendroth

The Internal Revenue Service (IRS) just released one of the all-time low interest rates applicable to certain wealth transfer techniques, including grantor retained annuity trusts (GRATs).

A GRAT is an irrevocable trust designed to transfer wealth to beneficiaries with little or no use of estate and gift tax exclusion. To establish a GRAT, the creator of the trust (the "grantor") transfers assets to a trust and receives a portion of those assets through annuity payments over a specified number of years. At the end of the GRAT term, the trust principal not returned to the grantor through the annuity payments will pass to the designated beneficiaries either outright or in trust, assuming the grantor survives the GRAT term. Most GRATs are designed so that the value of the annuity payments equals the value of the property transferred to the GRAT, so that the gift is zero.

Wealth transfer occurs when the assets used to fund the GRAT appreciate at a rate higher than the IRS Section 7520 rate (the "IRS rate") for the month in which the GRAT was funded. This means that any appreciation on the assets transferred to a GRAT in excess of the IRS rate will pass tax free to the designated beneficiaries at the end of the GRAT term.

This technique works best when the IRS rate is low and the possibility for growth of the underlying property is high. The IRS rate for April 2020 is 1.2 percent, the lowest it has been since 2013. Accordingly, you should consider whether the use of a GRAT could be beneficial in your estate planning.