While COVID-19 has created many problems for the financial markets and our clients, the low interest rate environment and the ongoing market volatility make this an appropriate time to consider Grantor Retained Annuity Trusts in your estate planning. A Grantor Retained Annuity Trust (“GRAT”) is a trust that allows you to transfer wealth to the next generation with little to no estate or gift taxes. In effect, you freeze the value of your estate while transferring the appreciation to the next generation.
While the current estate tax exemption per person is $11.58 million ($23.16 million per married couple) for 2020, this exemption sunsets at the end of 2025 and will revert to $5 million per person indexed for inflation. Congress could, however, change the estate tax exemption to even less than $5 million per person at any point in time. That said, if your estate exceeds $10 million today you could benefit from the creation of a GRAT.
Let’s discuss how GRAT planning can help you now given the future uncertainty. A GRAT is created when a grantor contributes assets to a fixed term, irrevocable trust. The grantor then receives an annuity stream (fixed stream of payments) from the trust based on the hurdle rate set by the IRS. At the end of the term, the remaining appreciation of the assets in excess of the hurdle rate are distributed to the next generation. Thus, the goal is for the assets contributed to the GRAT to outperform the hurdle rate.
Today, the annuity stream the grantor must take is based on a 1.2% annual interest rate (current rate for April 2020). For historical perspective, from January 2000 through April 2020, the hurdle rate has fluctuated between 1.0% and 8.2%. If throughout the life of the GRAT the assets outperform the hurdle rate set when the trust is created, then any amount in excess of the grantor retained annuity goes to the beneficiaries of the trust with little to no estate or gift tax. Even if the GRAT assets fail to outperform the hurdle rate, there is no penalty to you, apart from the legal cost of setting up the trust and administration fees for managing the trust. Thus, with current interest rates and market conditions, GRATs provide a powerful estate planning tool.
While this article only discusses the basic concept of GRATs, if you are interested in learning if GRATs can assist you please contact your Private Wealth Advisor.
By Read Sawczyn
Senior Vice President & Private Wealth Advisor, Trust
Articles In This Issue:
2020 First Quarter Review and Commentary
CARES Act and Your Retirement Plan
Download Full Newsletter Here
