Proposed Grantor Retained Interest Trusts Regulations Analyzed

David A. Berek (Credit Suisse Family Wealth Management) has recently published his article entitled What’s Great about GRATs?, 95 Ill. B.J. 438 (2007).  The article discusses the recently promulgated proposed regulations dealing with GRATs discussed earlier on this blog.

Here is an excerpt from the article:

The proposed regulations provide that only the portion of the GRAT necessary to satisfy the remaining annuity payment (after death) will be included in the decedent’s estate. Thus, if the annuity payment is $10,000 and the stated rate of return is 6 percent, property necessary to satisfy the remaining annuity payment would be $166,666.

While this rule may have a positive impact on some GRATs by consuming less than all of the property included in the decedent’s estate, this development is probably not helpful for a zeroed out GRAT. The reason: to zero out the GRAT, the grantor must increase the annuity payment. The greater the annuity amount, the less value left in the trust and the lesser the value of the gift.

Applying the proposed regulations to a zeroed-out GRAT, it becomes apparent that it will take a significant portion of the GRAT property to produce a high annuity based on the stated rate of return. Expressed another way, the amount includable in the decedent’s estate to produce the annuity payment will likely be the balance (if not more) of the GRAT. Thus, the proposed regulations do not offer much relief from the old rule that the entire GRAT is includible if the grantor dies during the term.

Note, however, that while the proposed regulations may not help with zeroed out GRATs, they certainly do not diminish the value of previous GRAT planning.