As a result of the passage of the new tax bill toward the end of 2010 the rate of the gift tax is going to be 35% in 2011 and 2012 and the lifetime gift tax exemption, which is unified with the estate tax exclusion, is now $5 million. When we use these numbers it is important to recognize that they will only be in place for these two years. As we saw at the end of 2010 there will be a new round of discussions as the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 starts to sunset.
Given the reality of these parameters many people are looking for ways to gain tax efficiency. If you would like to reduce the taxable value of your estate, realize a source of income, and potentially give a sizable gift to a loved one free of the gift tax you may want to consider the creation of a grantor retained annuity trust or GRAT.
The key to realizing the benefits of the implementation of this strategy is to fund the vehicle with assets that you expect to appreciate considerably. You set a term for the trust during which you will receive annuity payments, and you name a beneficiary who would receive any remainder that happens to exist at the end of this term.
The funding of the trust is considered to be a taxable gift by the IRS, and the total taxable amount will be calculated using a hypothetical amount of interest (120% of the federal midterm rate) that would be accrued during the trust term.
The objective here is to “zero out” the GRAT, so you construct the annuity payments to equal the full amount of the market value of the initial funding plus the interest that is anticipated by the IRS. If the assets appreciate beyond this IRS projection there will be a remainder left in the trust, and it passes directly to your beneficiary free of the gift tax.
Larry Parman
Founding Attorney
Since founding Parman & Easterday in 1985, Larry has led over 1,000 free, community-service education programs and helped more than 10,000 Oklahoma families go from putting off their estate plan to getting it done. His goal for every client is the same: to become the person their family calls "the one who took care of everything."
Larry is the author of three books: The Straight Shooter's Guide to Estate Planning; Estate Planning Basics; and Guiding Those Left Behind in Oklahoma. He served as Oklahoma's Secretary of State and Secretary of Commerce, and his firm is the only member of the American Academy of Estate Planning Attorneys in the state.
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