Monday, June 1, 2020
In the Ninth Circuit's decision in Badgley v. U.S., the court affirmed the lower court's ruling that the entire date-of-death value of the assets of a Grantor Retained Annuity Trust (GRAT) were includible in the settlor's gross estate for federal estate tax purposes. The decedent in Badgley created the GRAT in 1998 in order to facilitate the transfer of interests in a family-run partnership to the decedent's children.
The decedent died in 2012, a matter of months before the expiration of the annuity term. The assets of the GRAT had appreciated to almost $11 Mil and had the decedent survived the annuity term. the assets would have been successfully transferred to the decedent's children free of federal estate taxes.
The issue in Badgley was the extent to which the decedent's retained annuity interest caused the assets of the GRAT to be included in the decedent's gross estate. The question was essentially what extent of the assets were subject to estate tax. The decedent's representative argued that inclusion should be limited to the net present value of unpaid annuity payments. However, the IRS argued that the entire date-to-death value of the GRAT should be included. The court ultimately sided with the IRS reasoning that the decedent's retained annuity right was a substantial present economic benefit, which requires the inclusion of the entire GRAT under the Internal Revenue Code.
Despite the picture of GRATs that the Badgley decision paints, GRATs are a great way to transfer wealth with minimal transfer tax consequences, especially with the historically low interest rates. One thing the Badgley decision did accomplish is providing the lesson that one should consider the variables carefully in order to decide if a GRAT is an advisable strategy.
See Joseph Owens, 9th Circuit Affirms Decision Including Entire Value of GRAT in Decedent’s Gross Estate, Dickinson-Wright (Tax Blog), May 26, 2020.
Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.