GRATs

The Obama Administration might offer legislation that could affect grantor-retained annuity trusts or GRATs. The new law would restrict GRATs in several ways. First, if a GRAT “must have a minimum term of 10 years.” Second, the GRAT’s “remainder interest must be greater than zero upon creation of the trust.” Therefore, if the legislation is adopted by Congress, this could potentially lead to the end of the zeroed-out GRAT. This used to allow wealth people to transfer wealth to family members without incurring gift tax liability. 

GRAT work to reduce tax liability in the following manner. When a client transfers an asset to the GRAT, that client retains an interest in the asset. While the value of the original asset is taxable, that amount is reduced by the annuity interest that the grantor of trust retains. The larger the interest retained, the smaller the taxable amount. Taken to a logical end, if the grantor retains the full interest in the GRAT, then the grantor will incur no tax upon the GRAT. If the legislation does come to pass, then a wealth client might want to take advantage of the tax strategy now.

See Gavin Morrissey, Transfer Strategy While You Can, AdvisorOne, July 7, 2012.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.