As interest rates continue to be at historical lows, there are fleeting opportunities to engage in particularly effective estate planning techniques. One estate planning strategy that benefits from low interest rates is a GRAT.
The Basics
A GRAT, which stands for "grantor retained annuity trust," is created when an individual (the grantor) transfers assets into an irrevocable trust and retains the right to a series of annuity payments for a fixed term of years. After the annuity term, any balance remaining in the GRAT is transferred to (or held in further trust for) the family members who are named as the remainder beneficiaries. The initial transfer of the property to the GRAT is a gift for gift tax purposes; however, the value of the gift is reduced by the present value of the grantor’s retained annuity interest. A lower interest rate increases the value of the retained annuity and, thus, reduces the overall value of the gift of the remainder. In fact, GRATs are often "zeroed out" so that the remainder interest (i.e., the gifted amount) is effectively equal to zero and no gift tax is payable, although President Obama’s fiscal 2014 revenue proposals seek to require GRATs to have a remainder interest greater than zero. A successful GRAT will have the result of shifting the growth and appreciation of the transferred property to family members at no or minimal gift tax cost.
