X—Grantor Retained Annuity Trust (GRAT)

The Grantor Retained Annuity Trust (GRAT) is an estate planning technique that can be used to transferfutureappreciation to family members, or others, free of gift and estate taxes provided the grantor survives the trust term.

TRUST ESTABLISHED.In order to implement a GRAT, the grantor creates an irrevocable trust for a specified number of years, names his children as trust beneficiaries, and transfers to the trust property that has a potential for substantial appreciation. The grantor retains the right to receive, for the term of the GRAT, a “qualified annuity interest” based on either a specified sum or fixed percentage of the initial value of the property transferred to the trust. This annuity is mandatory and must be paid at least annually. The annual payment may be increased, provided the increase is not greater than 120 percent of the prior year’s payment. Additional contributions to the GRAT are not permitted.

Only the value of the remainder interest payable to the trust beneficiaries is subject to the gift tax. This value is determined by subtracting from the fair market value of the property transferred to the trust the present value of the annuity retained by the grantor. The value of this annuity is increased by a longer-term trust, larger annuity payments, and lower assumed interest rate used to make the present value calculation. To summarize, gift tax exposure isreducedif the present value of the retained annuity is increased and the value of the remainder interest is decreased: