All advanced estate planning concepts seem to described with an acronym. Grantor Retained Annuity Trusts (“GRATS”) are no different. If the overall value of your estate exceeds the estate tax exclusion, steps must be taken to mitigate your exposure. Though there is a gift tax in place, there are ways that you can transfer assets to your loved ones while you are still alive in a tax-free manner. One of these could be to “zero out” the tax when the gift is made by using a GRAT.
Here is the basic structure. You create an irrevocable gift naming children or grandchildren as the beneficiaries. The trust operates for a term of years, say five years. During the term, you as the creator of the trust retain income benefits. When the trust term expires, the asset transfers to the beneficiaries. If structured correctly the blend of your retained interest, the term, and the value of the remainder can result in zero gift tax due upon the transfer. Said another way, during the term you receive annuity payments and when you are creating the trust you arrange for these annuity payments to equal the entire taxable value of the trust, thus “zeroing out” any gift tax.
The key to this strategy is to fund the trust with assets that you would expect to appreciate considerably over its term. Funding the trust is considered to be a taxable gift by the IRS because you name a beneficiary who assumes ownership of any remainder that is left over in the trust upon the expiration of the trust term. Anticipated appreciation is accounted for by applying 120% of the federal midterm rate that was in place at the time the trust was created.
If the assets that you place into the trust perform extraordinarily well, there should be a remainder left over after the term expires. This remainder will become property of your beneficiary and the transfer of assets will take place free of the gift tax.
This is a powerful estate tax planning strategy, one certain to get resources into the hands of your loved ones without losing anything in the process. To learn more about grantor retained annuity trusts and other tax efficiency tools, simply pick up the phone to arrange for a consultation with a good Oklahoma City estate planning lawyer.
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Parman & Easterday
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