GRATs
RSS Issue FeedBACKGROUND
A grantor retained annuity trust, or GRAT, is a trust that allows an individual to retain a substantial ownership interest in trust property even while transferring future appreciation to his children or other beneficiaries. In a typical GRAT, the grantor puts assets into an irrevocable trust in exchange for an annuity, which is payable over a fixed term of years. The appreciation in the value of the trust assets in excess of the grantor’s annuity eventually passes to the trust beneficiaries free of the gift tax.
GRATs have proven to be a popular and efficient technique for transferring wealth while minimizing the gift tax cost of transfers, providing that the grantor survives the GRAT term and the trust assets do not depreciate in value. Taxpayers have become adept at maximizing the benefit of this technique, often by minimizing the term of the GRAT (thus reducing the risk of the grantor’s death during the term), in many cases to two years, and by retaining annuity interests significant enough to reduce the gift tax value of the remainder interest to zero or to a number small enough to generate only a minimal gift tax liability.
CHAMBER POSITION
The Chamber believes that GRATs serve an important function in making it easier to transfer wealth to succeeding generations by allowing the grantor to retain payment rights for a period of years. This increases the flow of wealth to younger people, who can use it to build and expand businesses, creating jobs and more tax revenue. Also, GRATs are expressly permitted under the Internal Revenue Code as a legitimate means of transferring the appreciation in value of property to one’s family or other beneficiaries while maintaining substantial control over the property itself.
The Chamber believes that the use of GRATs helps give some degree of clarity at a time when the future of the estate tax is uncertain. The Chamber believes that GRATs are an effective shorter term estate planning tool that may be used until there is some certainty for the estate and gift tax planning community and the families and small businesses they serve.
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