Bad economy means good time for GRATs

The potential benefits of using a grantor-retained annuity trust are discussed in Nate Hardcastle, A Time for Giving, Wall St. J., April 13, 2009.  Here are a few excerpts from this article:

Some estate-planning professionals are urging clients to take advantage of the [the bad economy] by setting up grantor-retained annuity trusts, vehicles designed to minimize or eliminate gift taxes on wealth transferred out of an investor’s estate during his or her lifetime.

The reason: Low Treasury rates have pulled down the rate the Internal Revenue Service uses to calculate tax on these trust assets. The lower this rate — known as the “hurdle” rate — the more a grantor-retained annuity trust, or GRAT, can potentially pass to beneficiaries free of gift tax.

In March, the hurdle rate stood at 2.4%, less than half of what it was a year earlier, after falling to 2% in February, its lowest level ever. * * *

The person who establishes a GRAT (the grantor) places investments in the trust, and receives annuity payments from those assets over the trust’s term — usually two to five years, but sometimes longer. The grantor pays taxes on investment gains and income, but any investment growth in excess of the hurdle rate passes to the trust’s beneficiary free of gift tax. * * *

There’s one important catch: The grantor must outlive the term of the GRAT, or assets in the trust revert to his estate. That provision may make it impractical to zero out a GRAT, especially when it is funded with illiquid assets such as real estate or a business.

The article also discusses the use of rescue GRATs to fix older GRATs which are  lagging behind the hurdle rate by a wide margin.

Special thanks to Patrick S. Sylvester (Attorney & Counselor at Law, Sylvester Law Firm, PC) for bringing this article to my attention.