- Grantor Retained Annuity Trusts ("GRATS") -- A Great Technique Faces an Uncertain Fate
- April 13, 2010
- Law Firm: Blank Rome LLP - Philadelphia Office
The window may be closing rapidly on one of the most popular—and effective—estate planning techniques—the GRAT. As a result, immediate action is recommended for clients who may be interested in creating a new GRAT or wish to consider “freezing” an existing GRAT that is “in the money.”
On March 24, 2010, the House passed H.R. 4849—The Small Business and Infrastructure Jobs Tax Act of 2010 (the “Act”). The Act would prohibit (1) GRATs with a term of less than 10 years, and (2) GRATs that have a gift tax value of $0 (so-called “Zero-ed Out GRATs”). The Act would become effective on the date of enactment by Congress. Therefore, although the Act faces an uncertain future in the Senate, these GRAT provisions could become law in the near future.
A GRAT is a gift and estate planning technique which uses IRS approved discount factors to make gifts that “leverage” your $1 million lifetime gift tax exemption ($2 million combined with a spouse). Most often GRATs are created with a short term (usually between 2 and 5 years) and are structured in a way that the reported gift tax value of the gift of the remainder interest in the GRAT is $0 or close to $0.
Many of our clients have existing GRATs that are currently “in the money” (i.e., the value of the GRAT’s assets exceed the remaining annuity payments). In these instances, it may be possible to “freeze” the existing appreciation by having the grantor replace the GRAT’s assets with other assets of equivalent value. In order to keep the “frozen” GRAT’s assets in play, such assets could then be rolled into a new short-term GRAT (but perhaps with a slightly longer term) before the Act is enacted.