Grantor Retained Annuity Trust (“GRAT”)

Grantor Retained Annuity Trust (“GRAT”) – Do you have assets with potential to appreciate in the next 2 – 5 years?


This estate planning technique utilizes IRS-approved discount factors to make gifts of assets having the potential for appreciation with minimal or no gift tax consequences. In a GRAT, the client transfers property to an irrevocable trust, retaining the right to a fixed annuity for a term of years, and the value of the gift to the trust for gift tax purposes is reduced by the IRS-determined present value of the client’s retained interest. If the client survives the term of the trust, any property remaining in the trust, including any appreciation in the trust assets that exceeds the IRS-assumed rate of interest (which is 3.4% for September, 2009, and is recalculated monthly), passes to the client’s beneficiaries free of any gift or estate tax.

Obviously while some GRATs may appreciate and succeed, others may fail. A GRAT may currently be structured so as to “zero out” the taxable gift with an annuity set at a level so that the present value of the client’s retained interest is equal to the value of the property transferred to the trust. This approach allows the use of any number of GRATs, some of which are likely to succeed. There is some discussion that Congress may change the law to require that a gift to a GRAT have a value of greater than zero for gift tax purposes, therefore requiring the use of a portion of the client’s lifetime exclusion for gifts (currently at $1 million, beyond which gift tax would be payable) and discouraging the use of an unlimited number of GRATs. However, low interest rates, currently low asset values and favorable law make a GRAT a particularly attractive estate planning tool at this time.