In prior columns I have written about GRATs and how they allow taxpayers to transfer more assets to their families and less to the IRS. GRATs, and other similar strategies are particularly important knowing that the federal estate tax, with rates perhaps as high as 45%, will remain long into the future. The Obama Administration and Congress are considering restricting GRATs.
GRATs allow the donor to transfer closely held stock, real estate, or marketable securities to a Trust for a minimum of two years. If the donor receives an annual annuity from the GRAT, the transferred asset or at least its appreciation, will pass to the donor’s family at the end of the GRAT term at a reduced value and is removed from the donor’s estate. The asset value is reduced for gift tax purposes because of the retained annuity. Obviously the greater the annuity amount and the longer the term of the GRAT, the greater the reduction in value of the transferred asset for gift tax purposes. In fact, it is possible to "zero out," meaning eliminate, the gift tax.
One catch: the donor needs to survive the term of the GRAT. Thus, an 80 year old would not choose a 20 year GRAT. In fact, regardless of age, many business owners choose 2 year GRATS to capture any savings possible, and then simply do repeated 2 year GRATS with the same assets (so called "rolling GRATS").
Under the Obama plan, the law would prohibit GRATS less than 10 years in duration, meaning the donor must live 10 years to remove the asset from the donor’s estate. A separate proposal in Congress would not tinker with the length of the GRAT, but would require a minimum gift imposed on the donor, perhaps as much as 10% of the transferred asset (thus eliminating zeroed-out GRATS).
This proposal, if enacted, will likely carry the date of enactment as the effective date. Thus, acting now becomes even more important.