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The GRAT’s Last Act? Proposed Legislation and Low Rates Require Another Look at GRATs Authors: Lawrence I. Richman, Martin H. Tish, Eric N. Mann, Michael C. Diedrich, Lauren A. Geoffrey Related Areas: Private Wealth Services June 21, 2010 On June 15, 2010, the U.S. House of Representatives passed the “Small Business Jobs Tax Relief Act of 2010” (H.R. 5486), which would restrict the use of grantor retained annuity trusts (“GRATs”) by requiring (1) a 10-year minimum term and (2) a taxable gift upon formation. These limitations are identical to those proposed in the “Small Business and Infrastructure Jobs Tax Act of 2010” (H.R. 4849) passed in March, which received no Senate action. Under current law, a GRAT can be structured with a short term (e.g., 2 years), which substantially reduces the mortality risk that the trust assets will be returned to the person creating the GRAT (its grantor) if he or she fails to survive the trust’s term. In addition, a GRAT currently can be formed with no gift tax (i.e., “zeroed-out”) if the fair market value of the property transferred to the GRAT equals the present value of the annuity returned to the grantor based upon the applicable IRS assumed interest rate. The U.S. House legislation is designed to make GRATs less attractive by preventing taxpayers from structuring GRATs in this manner. If approved by the U.S. Senate and signed by the President, these limitations would be effective upon the date of enactment. Low interest rates can substantially enhance the overall effectiveness of a GRAT. The applicable IRS assumed interest rate for transfers to GRATs during July, 2010 is 2.8%, down from 3.2% during June, 2010. The IRS interest rate is used to determine the present value of the annuity paid to the grantor. If the GRAT assets outperform the IRS interest rate, the GRAT will have assets remaining after paying the annuity, which will pass transfer tax-free to the grantor’s descendants at the end of the trust term. The decrease in the interest rate increases the likelihood of a successful transfer from the GRAT to the grantor’s descendants. The combination of the U.S. House legislation and low interest rates makes GRATs an attractive planning option. If you would like more information about the potential benefits and risks of GRATs, or if you have any questions regarding this Alert, please contact Lawrence I. Richman (312-269-8070), Martin H. Tish (312-269-8031), Eric N. Mann (312-269-8404), Michael C. Diedrich (312-269-5356), Lauren A. Geoffrey (312-269-5653) or any other member of the Private Wealth Services Practice Group. |
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