There are numerous acronyms that you will see tossed about when you look into the field of estate planning. One of these is the GRAT and in an estate planning context this stands for a grantor retained annuity trust. If you have appreciable securities, you may be able to “zero out” one of these trusts and facilitate a tax-free transfer of assets to the beneficiary in the process.
With a grantor retained annuity trust you as the grantor receive annuity payments annually throughout the term of the trust and you name a beneficiary who would assume any remainder that may exist after the expiration of the trust term. Because a transfer of assets may take place funding the trust is considered to be a taxable gift.
It is presumed that the assets in the trust will appreciate to some extent during the term. So, this is accounted for by the IRS by increasing the taxable value of the trust through the utilization of 120% of the federal midterm rate that is in place at the time of trust creation.
The idea is to “zero out” the trust by arranging for your annuity payments to equal the entirety of this taxable value. If the assets appreciate beyond the original IRS valuation, a remainder will exist when the trust term expires. Your beneficiary will assume ownership of this remainder without incurring any gift tax liability.
To learn more about these vehicles and other estate planning tools that provide tax efficiency, don’t hesitate to make an appointment to speak with a good Hartford estate planning lawyer.