January 21, 2020

January 21, 2020

Subscribe to Latest Legal News and Analysis

January 20, 2020

Subscribe to Latest Legal News and Analysis

Obama Administration Targets GRATs, a Powerful Estate Planning Technique

The Obama administration recently released its 2016 budget proposal, which includes provisions to curtail the use and effectiveness of grantor retained annuity trusts ("GRATs") as an estate planning technique. The administration has proposed limitations for GRATs before, without any changes being enacted. Nevertheless, GRATs remain an attractive target as Congress looks for tax law changes to raise revenue.

A GRAT is an irrevocable trust designed to transfer wealth to beneficiaries at little or no gift tax. 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, but only if the grantor survives the GRAT term.

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. Over the past year, the IRS rate has been between 1.8% and 2.2%. This means that any appreciation on the assets transferred to a GRAT in excess of that applicable percentage may be transferred to the designated beneficiaries at the end of the GRAT term at little or no gift tax.

The IRS rates have been at historic lows, making GRATs an attractive method for transferring wealth during life. Due to these historically low IRS rates and the potential elimination of this estate planning technique, you should consider whether the use of a GRAT could be beneficial in your estate planning. Although the possibility of a change in the law exists, at this point the GRAT remains one of the best low risk, high reward wealth transfer strategies.

© 2020 Schiff Hardin LLP


About this Author

Thomas Abendroth, Schiff Hardin, estate planning attorney, wealth transfer strategy lawyer, trusts legal counsel

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...

William R. Franzen, Schiff Hardin, Chicago, Succession Planning Lawyer

William R. Franzen has extensive experience counseling high net worth clients on family business succession and tax planning, estate planning, multigenerational wealth transfer, international tax planning, family office structure and administration, executive compensation planning and charitable organization formation and administration matters.

Mr. Franzen has written extensively on trust and estate planning issues for Illinois State Bar Association, Illinois Institute for Continuing Legal Education (IICLE) and American Bar Association publications and has also given numerous presentations to family offices, investment advisers and business groups regarding current estate and tax planning matters.

Harmon Brown, Estate Planning law, Trust Attorney, Schiff Hardin, tax exempt organization legal counsel, business succession lawyer

Harmon is an estate planner who has shepherded generations of families through the wealth planning labyrinthine. He is unflustered by the complicated family dynamics often associated with these matters and finds innovative ways to mitigate them in a timely and tactful manner. 

Harmon’s nationwide practice has helped clients plan for the transfer of their assets in a tax efficient and practical way. He has participated in a multitude of family meetings to develop, design and implement family estate planning. Harmon’s goal is to provide clients...