Tax Planning Advice: The Benefits of a GRAT—Benjamin Ledyard

Similar to a qualified personal residence trust (QPRT), another even more familiar—or notorious because it has been subject to four attempts by Congress to amend one of its key features—is the grantor retained annuity trust (GRAT). This is similar to a QPRT, but instead of living rent free, the grantor receives an annuity from the assets placed in the trust during its term. GRATs are especially attractive to those who are reluctant to gift an asset, say a bond portfolio, because they may need the income stream.

Ledyard says there are two reasons to explore GRATs right now. The increase in the gift tax exemption makes GRATs a more viable technique for clients who want to make larger asset transfers without triggering a tax and to receive an annuity for a period of time. And with government interest rates extremely low at present (the Applicable Federal Rate was 3% for March 2011), the grantor is able to lock in low rates for the term of the trust. The measure of the gift is the amount put in the trust, minus the annuity plus the interest rate factor.

A second reason to look at GRATs now is that they are under attack on Capitol Hill. Ledyard notes that during its just-ended term, Congress came close to imposing a 10-year term limit on GRATs, and President Obama's February budget message again called for the same term limit. Ledyard explains that GRATs are generally short term, two or three years, because the biggest risk attending a GRAT is the death of the grantor during the trust term, in which case the assets in the trust are pulled back into the taxable estate. A 10-year limit would effectively remove this technique from the estate planning arsenal.

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