GRAT Bill Passes House

On March 24, the U.S. House of Representatives passed H.R. 4849, a bill that would change the laws relating to Grantor Retained Annuity Trusts (GRATs). I previously blogged about this bill here and here.

The following, taken from Deborah L. Jacobs, The GRAT Rush of 2010, Fin. Advisor, March 29, 2010, provides a well-written explanation of some of the changes this bill would make:

For the moment, it is possible to form what’s called a zeroed-out GRAT, in which the remainder is theoretically worth nothing so that there is no taxable gift. . . . In its March 19 report on H.R. 4849, the House Committee on Ways and Means stated, “such uses of GRATs for gift tax avoidance are inappropriate.” Without requiring a specific value for the remainder interest, the bill indicates that it must be “greater than zero.”

More drastically the House bill requires GRATs to have a term of at least ten years, compared with the current two-year minimum. This greatly accentuates what is called the “mortality risk” of a GRAT: If the grantor dies during the trust term, all or part of the trust assets will be included in her estate for estate tax purposes.

The article concludes as follows:

With Congress on Easter recess until April 12, there’s a pause in the action and time to reflect on the potentially larger significance of H.R. 4849. This may well be a sign that we are in for creeping estate tax reform, rather than a single piece of legislation. It may also be the first step toward whittling away at some really great tax deals for high net worth clients. We may soon look back on the past decade as the golden era of wealth transfer.

Deborah L. Jacobs, The GRAT Rush of 2010, Fin. Advisor, March 29, 2010.