A window of opportunity to transfer wealth without gift or estate taxes may be closing

A window of opportunity to transfer wealth without gift or estate taxes may be closing

Grantor Retained Annuity Trusts (GRATs) are a powerful vehicle for transferring assets to family members free of gift and estate taxes. Clients who wish to take advantage of their tax benefits need to act soon.

A GRAT can be funded with a wide range of investments and is typically established for a term of two to five years. During that time, annuity payments are to be made from the trust to the grantor — not the beneficiary — until the principal plus an assumed interest rate have exhausted the trust. That assumed interest rate is specified by the IRS under Section 7520 and currently stands at 2.4% as of September 2010. Any income the trust earns above the assumed rate of 2.4% is called “remainder interest” and is passed on to the beneficiary free from gift or estate taxes. (If the trust earns less than 2.4% a year, the grantor receives all the remaining principal back and the beneficiary receives nothing.)

Two things make GRATs particularly attractive: First, the historically low interest rate environment means it is possible that the remainder interest earned in a GRAT could be substantial. Second, the ability to establish a GRAT for a relatively short period of time means that clients regain access to their funds sooner, should they want to put those assets to another use.

However, pending legislation in Congress would impose a minimum term limit of 10 years on these trusts, which would require clients to tie up funds for a longer period of time than they may wish. Making clients aware that the waning opportunity to establish short-term GRATs can be a big differentiator and lead to high-quality referrals. Clients must work with a qualified attorney to establish a GRAT.

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