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Overview

In a typical GRAT, you transfer a property trust, retaining the right to receive an annuity payment for a fixed term. At the end of the term, the remaining trust property passes to your children or other family members (called the trust “remainder beneficiaries”). The taxable gift is the total value of the property placed in the trust minus the discounted present value of your retained annuity stream. The discounted present value of the retained annuity stream is valued using a discount rate published by the IRS. The trust is generally structured so that the taxable gift is close to or equal to zero. Any appreciation in the transferred property in excess of the applicable discount rate passes to the remainder beneficiaries gift tax free.

There are three reasons why now is a good time to consider a GRAT. First, the discount rates published by the IRS are at or near record lows. This means that the average rate of return of the GRAT assets need not be extraordinary for your GRAT to out-perform the IRS assumed rate of return. Second, given the worldwide decline in asset values in 2008 and 2009, the values of your assets are likely depressed. Assets which are undervalued now, but which you expect will appreciate at a rate greater than the IRS assumed rate of return, can be good assets to transfer to a GRAT. The final, and perhaps most important reason to consider a GRAT now, is that Congress is considering legislation that would limit the availability of certain kinds of GRATs in the future. If you are considering a GRAT, we recommend that you act before the law is changed.