It is important to retain the services of an experienced estate planning attorney rather than going the DIY route or engaging the services of a general practicioner because it takes time and focus to understand the best way to position certain types of assets. Each estate is different and every family is unique, and a good estate planning lawyer understands this and gives each client specialized attention.
There are a number of different financial instruments of varying complexity that can be used to great advantage under certain circumstances, and one of these is the grantor retained annuity trust or GRAT. The key to the use of a grantor retained annuity trust is to fund the vehicle with appreciable assets. After appointing a trustee you name a family member as the beneficiary who would assume ownership of the remainder that may be left in the trust after its term has expired.
When you fund the trust you’re removing the value of those assets from your estate and you gain estate tax efficiency in the process. This transfer does constitute a taxable gift, and the IRS calculates the taxable value of the gift in light of anticipated appreciation using 120% of the federal midterm rate that was in place during the month the trust was created. If you take annuity payments equal to this entire amount over the term of the trust, you are “zeroing it out” and because of this your gift tax liability vanishes because you’re retaining all of the interest in the trust.
If your assets do in fact appreciate beyond the original IRS valuation, there’s going to be something left in the trust at the end of its term. The beneficiary that you chose when you created the vehicle will assume ownership of this remainder tax-free. So through the creation of the grantor retained annuity trust you are able to reduce the taxable value of your estate, set up a source of ongoing income for yourself, and ultimately provide a tax-free gift to a loved one all in one fell swoop.
