The January 28, 2008 Post explained why 2-year GRAT’s (Grantor Retained Annuity Trusts) are an essential estate planning tool for affluent taxpayers looking to pass wealth to children and other beneficiaries with little or no gift or estate tax consequences. No other tax strategy is as straight forward, effective and IRS sanctioned.
What was a wonderful idea in January 2008 is even a better idea in Spring 2008 for the following two reasons: First, the interest rate applicable to GRAT’s is now one percent lower than in January: the rate has decreased from 4.4% to 3.4%. Therefore, if assets transferred to a GRAT appreciate at greater than 3.4%, the excess appreciation passes to beneficiaries chosen by the taxpayer estate tax free. Perhaps this interest rate will decline even further in coming months, however, at 3.4% the rate is attractive regardless of future fluctuations. Second, although nobody can time the stock market, many believe it has bottomed out. (Note, GRAT’s also can be used with real estate and closely held businesses, but this Post assumes taxpayers hold marketable securities.)
For example, if in April a taxpayer transferred $1 million to a 2-year GRAT, when the applicable rate is 3.4%, and the assets appreciated at 10% over a 2-year period, approximately $106,000 would pass to beneficiaries tax free. The taxpayer would have received from the GRAT approximately $1,050,000. The taxpayer would then roll the $1,050,000 into the next GRAT.
The combination of low interest rates and declining asset values are causing hardship and concern for many investors. A mixed blessing arising from this down market is that, for taxpayers who have estate planning issues, acting now with GRAT’s, sales to Intentionally Defective Trusts, or other estate planning strategies, will preserve substantial wealth for their families and future generations long into the future. When the market turns positive, substantial wealth will already have been removed from the taxable estate.