Walton GRATs Explained

Michael L. Graham and Jonathan G. Blattmachr have recently released their article entitled Six Steps to a Marital Deduction for a Walton GRAT or How I Learned to Love the Bomb.  Here is an excerpt from the introduction to their article:

The Walton case (Walton v. Com., (2000) 115 T.C. 589), which sets forth how to reduce the gift element of a Grantor Retained Annuity Trust (a “GRAT” herein) to near zero, and the subsequent acceptance thereof by the IRS as announced in Notice 2003-72, 2003-2 CB 964, added a powerful tool to the estate planner’s toolbox. However, with all due respect to the 1960s movie “Dr. Strangelove,” a Walton GRAT for a married grantor can create an estate tax bomb, waiting to explode if the grantor dies prior to the termination of the term of the GRAT. It is, perhaps, an overstatement to compare such a result to the sight of Slim Pickens riding the bomb like a bucking bronco to its final destination. However, for most estate planning attorneys, the loss of the marital deduction for all properties held in the GRAT would be an unpleasant experience, sure to result in the need to notify one’s professional liability insurance carrier of a potential claim.Walton-style provisions will almost always result in (i) inclusion of all of the GRAT properties in the grantor’s estate for estate tax purposes, and (ii) a situation in which that included GRAT property cannot qualify for the marital deduction.

If the grantor dies during the term of the GRAT, the standard Walton requires that the GRAT not terminate upon the grantor’s death. Rather, the GRAT must continue for the full term, whether or not the grantor dies during the term of the trust. Since the GRAT continues, the property cannot return to the grantor’s estate, where it could pass under the grantor’s other estate planning documents in a manner designed to qualify for the all important marital deduction.Walton GRAT trust agreement which, if implemented correctly, will allow the GRAT to continue for the full term (complying with the Walton requirements) and qualify, if necessary, for the marital deduction in the grantor’s estate.

There are, however, six modifications [described in detail in the article] to the standard Walton GRAT trust agreement which, if implemented correctly, will allow the GRAT to continue for the full term (complying with the Walton requirements) and qualify, if necessary, for the marital deduction in the grantor’s estate.