GRATs and the Annuity Payment Right

Michael Whitty (partner, Winston & Strawn, Chicago, trusts and estates group) has recently published his article entitled Heresy or Prophecy: The Case for Limiting Estate Tax Inclusion of GRATs to the Annuity Payment Right, 41 Real Prop., Prob., & Tr. J. 381 (2006).

Here is the editor’s synopsis of the article:

This Article begins by describing the controversy over the extent to which a grantor retained annuity trust, or GRAT, is included in the grantor’s taxable estate when the grantor dies within the GRAT’s primary term.  The author reviews his prior article critiquing the stated position of the Internal Revenue Service and responds to one counter-critique that article received.  The author continues with a discussion of the nature of GRATs and how they are commonly used today.  The author next reviews the pertinent parts of the controlling statutes, Treasury Regulations, existing cases, and rulings of the Service to evaluate whether, when, and to what extent a GRAT includes a right to income that, by itself, would cause estate tax inclusion.  The author next addresses how inclusion of superfluous or unnecessary provisions could lead to estate tax inclusion of a greater portion of a GRAT than would otherwise be included.  The author then describes a possible savings clause and other techniques for designing and administering GRATs to minimize the amount subject to inclusion in the grantor’s taxable estate.  The author concludes with some predictions and educated guesses on where this controversy may lead.