It is possible to utilize a grantor retained annuity trust or GRAT to transfer assets in a tax efficient manner under the right circumstances.
Before we get into the zeroed out grantor retained annuity trust strategy, let’s look at the estate tax parameters. The maximum rate of the tax in 2014 is 40%. The gift tax is unified with the estate tax, and it too has a 40% top rate.
The current amount of the estate tax exclusion in 2014 is $5.34 million. Those in possession of assets that exceed $5.34 million in total value may want to consider zeroing out a GRAT.
To implement this strategy, you convey assets into the trust, name a beneficiary, and schedule annuity payments that will be made to you throughout the term of the trust.
Anticipated interest is calculated by the IRS using the Section 7520 rate that was holding sway at the time the trust was created. In July of 2013 when this is being written, the amount of this rate is 1.4%.
Zeroing out the GRAT is accomplished by arranging for the sum total of the annuity payments to equal the entirety of the taxable value of the trust as it is calculated by the Internal Revenue Service.
When interest rates are low, the assets may well earn more than the Section 7520 rate. If this is the case, there will be something left over in the trust at the conclusion of the term.
There will be no tax consequences as the beneficiary that you named when you created the trust assumes ownership of this remainder.
If you have assets that exceed the estate tax exclusion, our office can help you develop an estate plan that will optimize your assets while minimizing your estate tax exposure. Contact us to schedule a free consultation to discuss you estate planning needs.