GRATs Can be a Home Run

Congratulations to the Nationals!

With interest rates at near record lows, it is a great time to consider a grantor retained annuity trust (GRAT).  GRATs are a planning technique in the Internal Revenue Code to remove future appreciation in the asset gifted to the GRAT out of the grantor’s estate.  The grantor contributes an asset to the GRAT and retains an annuity for a term.  If the value of the annuity is less than the value of the asset, a taxable gift results for the difference.  Often, the GRAT is structured so that the annuity value and asset value are near equal (called “zeroing out”).  Assets remaining after the GRAT term ends, are out of the grantors estate.   There is minimal valuation risk with a GRAT since, if the value of the asset is found to be higher than reported, the annuity payment increases.  In order to be effective, the grantor must survive the GRAT term.  Accordingly, a GRAT isn’t a good technique for a grantor with health issues, unless a short term is used.

Often a discounted asset is contributed to the asset.  This makes it easier to grow the asset over the annuity payment.  However, the discounted asset doesn’t work so well, if the contributed asset doesn’t produce sufficient cash flow to pay the annuity.  There are ways to address this issue, however, and make the GRAT a potential home run!


About Grady Dickens

I created this blog to comment on items of current interest regarding trusts, estate planning, charitable planning and tax law, and share my knowledge and over thirty years of experience as an attorney practicing in Dallas, Texas.