Thursday, October 28, 2010
Not only is the estate tax set to come back with a vengeance next year, but Congress is also trying to put limits on a popular trust used to avoid the tax. A grantor-retained annuity trust (GRAT) allows people to pass some of an asset’s future profits tax-free to heirs. Now is a great time to create a GRAT for several reasons.
First, Congress may make GRATs less valuable in the near future in order to raise revenue. Congress wants to require that GRATs remain in place for a minimum of 10 years rather than the current minimum of 2 years. This makes GRATs less useful for those with shorter life expectancies because if the owner of a GRAT dies before the trust expires, the entire value is included in the owner’s gross estate. Until Congress acts, short term GRATs can still be created.
Second, when interest rates and asset values are low, as they are now, heirs can receive a larger portion of future profits of assets in the GRAT. A GRAT’s owner must agree to take back the “hurdle rate,” which is lower when the interest rate is lower, leaving more appreciation for heirs.
Third, aside from premature death, there are little risks involved with GRATs. If asset values fall, the owner is no worse off than he or she would have been without the GRAT, except for the loss of money paid to create the GRAT.
See Anne Tergesen, Hurry Up and Fund That Trust, W.S.J., Oct. 16, 2010.
Special thanks to Joel Dobris (Professor of Law, UC Davis School of Law) and Jim Hillhouse (WealthCounsel) for bringing this to my attention.