The GRAT–GST Tax Interface

Edward M. Manigault and Milford B. Hatcher Jr. (both partners in the Atlanta office of Jones Day) have recently published their article entitled GRATs and GST Planning — Potential Pitfall and Possible Planning Opportunity, Prob. & Prop., Nov./Dec. 2006, at 28.  Here is the introduction to their article:

Many clients have GST exemptions that exceed their lifetime gift tax applicable exclusions, especially because the maximum GST exemption (currently $2 million) presently exceeds the maximum gift tax exclusion of $1 million.  The excess can increase as clients make taxable gifts that are not GST transfers, and it will continue to grow when the GST exemption increased to $3.5 million in 2009. * * * Advisors are therefore looking to devise ways for clients to take advantage of the use of excess GST exemption over the gift tax applicable exclusion amount without making any, or at least not material, taxable gifts.  One excellent transfer technique is, of course, a GRAT.  Using GRATs for GST planning, however, presents one pitfall, but also a possible planning opportunity.