Obama Administration Targets GRATs, a Powerful Estate Planning Technique
Monday, May 4, 2015

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.


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