September 20, 2021

Volume XI, Number 263

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September 20, 2021

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September 17, 2021

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Enhanced Opportunity for GRATs as a Powerful Estate Planning Technique

The Internal Revenue Service (IRS) just released one of the all-time low interest rates applicable to certain wealth transfer techniques, including grantor retained annuity trusts (GRATs).

A GRAT is an irrevocable trust designed to transfer wealth to beneficiaries with little or no use of estate and gift tax exclusion. To establish a GRAT, the creator of the trust (the "grantor") transfers assets to a trust and receives a portion of those assets through annuity payments over a specified number of years. At the end of the GRAT term, the trust principal not returned to the grantor through the annuity payments will pass to the designated beneficiaries either outright or in trust, assuming the grantor survives the GRAT term. Most GRATs are designed so that the value of the annuity payments equals the value of the property transferred to the GRAT, so that the gift is zero.

Wealth transfer occurs when the assets used to fund the GRAT appreciate at a rate higher than the IRS Section 7520 rate (the "IRS rate") for the month in which the GRAT was funded. This means that any appreciation on the assets transferred to a GRAT in excess of the IRS rate will pass tax free to the designated beneficiaries at the end of the GRAT term.

This technique works best when the IRS rate is low and the possibility for growth of the underlying property is high. The IRS rate for April 2020 is 1.2 percent, the lowest it has been since 2013. Accordingly, you should consider whether the use of a GRAT could be beneficial in your estate planning.

© 2021 Schiff Hardin LLPNational Law Review, Volume X, Number 79
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About this Author

Kristen Pace Estate Planning Attorney Schiff Hardin Law Firm
Associate

Kristen Hosack Pace assists clients with general estate planning, including wills and trusts, lifetime gift planning, estate administration, and charitable planning.

Kristen was a participant of the University of Illinois Community Preservation Clinic, where she represented clients under the supervision of a licensed attorney throughout the proceedings of the McLean County Foreclosure Mediation Program. She also gained valuable experience as a Schiff Hardin summer associate, and as a judicial extern for the Honorable Michael P. McCuskey in the U.S. District Court for the Central...

312.258.5870
Allison Pfeifle, Schiff Hardin Law Firm, Chicago, Estate and Tax Law Attorney
Associate

Allison is a strategic estate planning and tax attorney with a diverse background. She represents clients ranging from individuals and small business owners to fiduciaries and companies of all sizes. Allison brings hands-on experience from multiple roles within the legal and financial services industries, including work for a global family office, externships with the Internal Revenue Service and the Cook County Probate Division, and managing fiduciary relationships for an established trust company. Allison highly values the ability to translate complex estate planning...

312-258-5581
Thomas Abendroth, Schiff Hardin, estate planning attorney, wealth transfer strategy lawyer, trusts legal counsel
Partner

Tom Abendroth combines the precision of a “numbers guy” with the insight and understanding of a trusted confidant. Deep knowledge of the tax law and estate planning techniques is critical for any private client's attorney. Tom pairs that knowledge with a strong sense of empathy that allows him to quickly discern the sensitive family issues that a client needs to address in his or her estate plan.

Tom counsels clients on the full range of wealth transfer planning, seamlessly melding the tax implications of estate planning with the unique...

312-258-5501
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