For the first time in over four years, the Federal Reserve (the Fed) reduced its market rate and signaled future cuts could be forthcoming. Since 2022, while the market rates have risen, certain estate planning strategies have been paused or avoided. With the potential Jan. 1, 2026, sunset of the Tax Cuts and Jobs Act of 2017 (TCJA) and the reduction of the federal estate and gift tax exemption to $5 million, indexed for inflation (estimated to be approximately $7.2 million), advisers should consider whether grantor retained annuity trusts (GRATs), charitable lead trusts (CLTs), intra-family loans, and sales to intentionally defective grantor trusts (IDGTs) should be re-evaluated and re-considered for high net-worth families.

Grantor Retained Annuity Trusts

A grantor retained annuity trust (a GRAT) is an irrevocable trust in which a grantor contributes property in exchange for the right to receive a specified amount (or property with a specified value) (an annuity) each year for a term of years (current minimum of a two-year term) (the "annuity period"). The present value of the retained right is calculated using the current interest rate announced by the Internal Revenue Service, which is set each month and is essentially 120% of the minimum interest rate used in family loans with a moderate term (known as the "7520 Rate"). This present value of the grantor's total GRAT annual payments is subtracted from the fair market value of the assets on the date of the transfer to the GRAT to determine the taxable amount of the gift to the recipients at the end of the retained interest period. For some clients, the taxable residual amount is "zeroed-out" such that the actuarially-adjusted present value of the annuity payments, in the aggregate, equal the initial value of the assets transferred to the GRAT with the annuity payments paid to the grantor's estate if she dies during the annuity period.