McNamee Hosea News & Press


Grantor Retained Annuity Trusts Revamped (GRAT)

House Passes Bill Which Would Revamp Grantor Retained Annuity Trusts (GRAT)

On June 15, 2010, in a 247-170 vote, the House Passed a small-business tax bill (Small Business Jobs Tax Relief Act of 2010 or H. R. 5486) that is intended to raise more that $5 Billion and revamp grantor-retained annuity trusts (GRAT).

A GRAT is an irrevocable trust and valuable estate planning tool. A GRAT is a split interest trust in which an individual, referred to as the grantor, irrevocably transfers property to such trust and retains an annuity interest in the trust property ("Retained Interest") for a specified number of years. At the end of the selected term, the trustee of the GRAT distributes the remaining assets in the GRAT ("Remainder Interest") to the named beneficiaries (known as "remainder beneficiaries") either outright or in trust.

The Remainder Interest is considered a taxable gift, which reduces the grantor's lifetime gift exclusion to the extent it has not already been utilized. Hence, a gift tax return must be filed for the year the GRAT is funded, and as long as the grantor survives the term of the GRAT, the value of the Remainder Interest will be excluded from the grantor's taxable estate.

A properly structured GRAT provides the added/alternate benefit of removing any appreciation in the value of the Remainder Interest from the estate of the grantor, provided the GRAT assets are properly managed and they outperform the rate of return that is established by the IRS. The IRS' rate of return is known as the Section 7520 rate, and it is locked in once the grantor funds the GRAT. The GRAT assets have to generate a higher rate of return than the Section 7520 rate for the value of the principal of the GRAT at the end of the term to appreciate in value and exceed the taxable gift determine at the formation of the GRAT.

H. R. 5486 would restrict GRATs in the following ways:

  1. Require a minimum 10 year term - this requirement would increase the probability that the grantor does not survive the trust term thereby causing the trust estate to be included in the Grantor's gross taxable estate
  2. Fixed amounts, when determined on an annual basis, cannot decrease relative to any prior year during the first 10 years of the term - this requirement prevents the possibility of skirting around the 10 year minimum rules by front-loading all GRAT payments.
  3. The remainder interest must have a value greater than zero determined as of the time of the transfer - this requirement would eliminate the possibility of setting up GRATs with transfers having an actuarial value of zero for gift tax purposes.
  4. The effective date would be for "transfers made after the date of the enactment of this Act". The Act is not yet law. However, we expect it to soon become law. Hence, now is the time to act upon this opportunity.

For the time being, GRATs are still an effective estate planning tool that when implemented properly, can provide significant financial rewards for the donor and the recipient. For more information regarding the incorporation of GRATs into your estate plan and other estate planning tools, please contact Esther Streete at 410-266-9909 or [email protected]