December 6, 2021

Volume XI, Number 340

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December 03, 2021

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GRATS — Grantor Retained Annuity Trusts

Summer 2021

A GRAT is an irrevocable trust into which a client transfers property—typically property with high-growth or income producing potential—and from which he or she receives back an annuity payment for a fixed term. In the popular GRAT structure known as the “zeroed-out” GRAT, the annuity payment is designed to roughly equal the value of the property transferred to the trust, such that the grantor is able to fund the trust without using any of his or her gift tax exemption. At the end of the GRAT term, any property remaining in the trust passes to the remainder beneficiaries gift-tax free. In effect, the zeroed-out GRAT strategy moves appreciation out of the grantor’s estate at no gift or estate tax cost.

The calculation of the annuity amount is derived from a discount rate published by the IRS each month, called the “7520 rate.” To the extent a GRAT’s investment performance exceeds this rate (and after taking into account related expenses, such as advisory fees), the property will remain in the trust and pass transfer tax free to the trust’s remainder beneficiaries.

Over the last five years, the 7520 rate has ranged from as high as 3.6% to as low as 0.4%. The 7520 rates for the current year to date are as follows:

March 2021 0.8%
April 2021 1.0%
May 2021 1.2%
June 2021 1.2%
July 2021 1.2%
August 2021 1.2%

Depending on the type of asset being transferred, clients may also consider creating GRATs of various terms. While we still remain in a low interest rate climate, GRATs continue to be particularly effective planning tools to gift assets without using any gift tax exemption.

© 1998-2021 Wiggin and Dana LLPNational Law Review, Volume XI, Number 237
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