There are certain estate planning strategies that are ideally implemented when market conditions are ripe. With this in mind, we would like to take a look at the grantor retained annuity trust or GRAT, a device that can be utilized to transfer assets in a tax efficient manner.

First, let’s examine the estate tax parameters. We have a federal estate tax exclusion of $5.25 million in 2013. The portion of your estate that exceeds this amount could be subject to the estate tax when it is transferred to your heirs.

The maximum rate of the gift tax and the estate tax is 40% in 2013.

It may be possible to transfer some of your resources to a beneficiary when you are still alive in a tax-free manner through the utilization of what is referred to as the zeroed out GRAT strategy.

To provide a brief explanation, you convey assets into the trust and name a beneficiary who would assume ownership of any remainder that may exist after the trust term has expired.

You as the grantor receive annuity payments throughout the duration of the trust term. The Internal Revenue Service tacks on anticipated interest earnings using the Section 7520 rate.

The best time to create a GRAT would be when the Section 7520 interest rate is low. At the time of this writing it is indeed quite low at 1.4%.

Zeroing out the GRAT involves arranging for your annuity payments to equal the entirety of the projected value of the trust over the course of the term.

However, if the assets earn more than the estimated interest applied by the IRS a remainder will exist when the trust term expires. This remainder will become the property of the beneficiary, and no gift or estate taxes will be levied on the transfer.

Larry Parman
Author, President and Founding Attorney
Parman & Easterday