In this depressed economic environment, many wealthy people still have an estate tax problem. This problem will worsen as the economy bounces back. Those who already have estate tax concerns will face an even larger estate tax burden as their portfolios begin to recover. Forty-five percent of the appreciation could end up in the government’s coffers rather than their family’s pockets. Fortunately, depressed stock and housing markets, and the continued presence of low interest rates, present an excellent opportunity to allow more wealth to pass on to one’s family. Whether one is charitably inclined or not, there are several estate-planning vehicles specifically designed to take advantage of the current instability in the financial environment. One such popular estate-planning vehicle is a grantor-retained annuity trust (“GRAT”). A GRAT is a vehicle designed to take advantage of asset appreciation over a short period of time, with most of that appreciation in value being transferred to one’s family at little or no gift or estate tax cost to the transferor. Those who believe that stocks they own are undervalued today and have a strong upside potential over the next few years should consider using a GRAT as part of their wealth transfer planning.
Generally, when a person transfers assets to a trust for the benefit of another person, the transferor (also referred to as the “grantor”) uses up the annual gifting exclusion, expends some lifetime exemption amount, and/or pays a gift tax on the value of the property transferred to the trust. However, where the grantor of the trust retains an interest in the trust, the present value of that retained interest may be subtracted from the value of the property transferred to the trust in determining the amount of the taxable gift made to the trust. The gift tax is imposed on the present value of the partial interest transferred, i.e., the remainder interest, and not on the present value of the partial interest retained by the grantor.
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