Considering a GRAT? What You Should Know First
By: Barry E. Haimo, Esq.
August 12, 2021
You’ve worked hard to amass your wealth. And you want to pass it on to those you’ve chosen with as little hassle as possible. However, due to the size of your estate, you may find that you could be responsible for a lot more gift and estate taxes than you anticipated.
The good news is that there are several things you can do to reduce the amount owed in taxes when it comes time to pass your estate on to others. One of the most useful tools out there is a Grantor Retained Annuity Trust, also referred to as a GRAT.
Here’s what you need to know about GRATs, how they work… and why their future may not be so clear.
What Is a GRAT?
A grantor retained annuity trust is a tool with multiple benefits. Crafted correctly, it can serve as a valuable part of your own retirement strategy while also saving your beneficiaries on taxes they would otherwise have to pay.
How does that work?
Under a GRAT, an irrevocable trust is created for a defined period. Since this is an annuity trust, that means it involves money being regularly distributed in equal installments during that time period. And because it is a grantor-retained trust, and the entity creating it is the grantor, that means you will be receiving those regular payouts — hence why it can be an important part of your retirement plan.
But it is also designed to minimize taxes on the transfer of wealth to others for a couple of reasons. First, the annuity payments to yourself do not count for gift tax purposes. Second, if the trust return is equal to or greater than the IRS Section 7520 interest rate, then any appreciation of the assets passes to the beneficiaries gift-tax-free. This rate from the IRS is used for gift and estate planning purposes and changes monthly depending on the economy. Third, this gift to the GRAT takes assets out of the estate, which can reduce the value of the estate and minimize estate taxes.
Because of this, GRATS tend to be used for high-yield assets such as stocks, which typically offer a return significantly greater than that set down in the “§7520 rate.”
What Types of Assets Can Be Contributed to GRATs?
Beyond stocks, GRATs are best used for options and other types of high-yield assets that are likely to exceed the “§7520 rate” and essentially generate gift-tax free income for loved ones.
The Future of GRATs
While GRATs are a great tool for many people, they may not be here to stay as they are now. Lawmakers, as well as President Biden, want to mandate a 10-year minimum for GRATs due to the fact that there is less predictability for the growth of assets over a longer period.
Basically, under the current system, it’s easier to predict which assets will provide the best short-term yield and therefore avoid taxes. Mandating a 10-year minimum would effectively eliminate the short-term GRATs that so many find beneficial in estate planning.
If you want to find out more about utilizing a GRAT in your estate planning, contact the legal professionals at Haimo Law today. We’ll help you protect your family, assets, and business, and gain the peace of mind from knowing you’re prepared and in control. Call us to get started today at 954-228-3369.
Barry E. Haimo, Esq.
Strategic Planning With Purpose®
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