A Look at Grantor Retained Annuity Trusts
A GRAT is a Grantor Retained Annuity Trust, and the IRS recently investigated whether a specific GRAT – despite its omission of specific key language – remained valid. GRATs allow grantors to transfer property into the irrevocable GRAT and to be granted, in exchange, an annuity (the retained interest) for a specific number of years. This retained interest is calculated on the IRS monthly interest rate (the Section 7520 rate) and must be considered qualifying interest under IRS Code. Upon the GRAT’s term end, any trust balance is distributed amongst the trust remainder beneficiaries.
Taxable and Non-Taxable Gifts
If a balance does remain at the end of the GRAT’s term, the value of that taxable gift is determined by subtracting the retained interest or total annuities from the fair market value of the total assets. As the retained interest grows, the taxable gift shrinks. In fact, Grantor Retained Annuity Trusts can now be zeroed out, which incurs no gift tax – a financial boon. To zero out a GRAT, the grantor typically must outlive the GRAT’s terms. If not, the balance used to generate annuity payments will be processed back into the grantor’s estate.
If your GRAT can outperform the IRS 7520 tax rate, you’re golden – any growth beyond this rate becomes a tax-free outpouring to your trust remainder beneficiaries. GRATs naturally work best with those assets that are uniquely high appreciators, such as closely held business offerings and securities.
Estate law is exceedingly complicated. The IRS did find that, because of its obvious intent, the questionably worded GRAT mentioned above could be altered to remain a valid Grantor Retained Annuity Trust. Nevertheless, you don’t want your GRAT to come up short. A GRAT is a uniquely strong tool for structuring tax-free benefits. Your estate is too important not to retain skilled legal guidance. Contact an experienced estate law attorney to help ensure that you’re legally protecting your beneficiaries and your estate.
If You Are Considering a GRAT, Contact a Skilled New Jersey Estate Law Attorney
Your estate is worth protecting. Don’t allow gift taxes to unnecessarily eat away at your beneficiaries’ distributions; contact or call John L. Schettino law today at (201) 498-9768 for skilled guidance structuring your Grantor Retained Annuity Trust to protect both your estate and your beneficiaries.