The Grantor Retained Annuity Trust or “GRAT” is a great vehicle which may be used to transfer a great deal of value for little or no estate, gift, or generation-skipping “cost.” Thanks to some Wal-Mart heirs’ shrewd planning, this even works if the GRAT is “zeroed-out.”

Let’s take a closer look. A GRAT is a trust in which the grantor retains a right to a stream of annuity payments for a term of years. During that term, the grantor gets these payments and whatever remains goes to the remainder beneficiaries. It might go to those beneficiaries outright or in trust.

For example, the grantor could contribute $1 million into a GRAT in June 2012. The 7520 rate in that month will be an exceptionally low 1.2%. That is the rate the IRS will assume that the assets will return. Based on that, if the annual payments to the grantor were $106,718 for ten years, then the actuarial value of the remainder interest would be zero. Thus, it would be a “zeroed-out” GRAT.

Let say that the assets are invested in the stock market and earn a 2% dividend yield and a 7.5% growth in assets. At the end of the term, after making the tenth and final payment of $106,718 to the grantor, there would still be money left in the trust. In fact, based on these assumptions, there would be $828,724 left in the trust. The phenomenal thing is that these assets would go down to the beneficiaries without any transfer tax of any kind.

During the term of the GRAT, it is a grantor trust for income tax purposes. In other words, the income from the trust, the 2% dividend in our example, is taxed directly to the grantor. So, the trust is not diminished by this income taxation. If desired the beneficiaries could be left the remainder in a continuing grantor trust. Thus, the $828,724 could continue to grow tax-free for the beneficiaries.

How is this possible? It’s not in an IRA or ERISA plan. The assets would grow tax-free because the grantor would be paying the tax from his or her own assets, freeing the remainder assets from that burden.

The GRAT is such a great strategy, it has been targeted by the Administration for limiting legislation. The Administration would like to require a 10% minimum value to the remainder interest, as well as other restrictions, including a 10-year minimum GRAT term.

Right now, clients are awash in today’s $5.12 million of applicable exclusion. But, come New Year’s, clients will be much more concerned with conserving their comparatively paltry $1 million applicable exclusion. This will make the GRAT the strategy du jour in 2013. Start learning about it now!

Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
www.aaepa.com

Mark Zuckerberg and Dustin Moskovitz have come a long way since 2004, when they started Facebook in their Harvard dorm room. Zuckerberg is currently CEO of Facebook, while Moskovitz left the company in 2008. Both hold substantial shares of Facebook stock, and are among the wealthiest people in the world.

As you have no doubt heard, Facebook is poised to go public. TechCrunch has reported the company is looking at a May 17 IPO date, with an anticipated value of $100 billion.

By all indications, Zuckerberg and Moskovitz have carefully planned for the coming increase in their already substantial net worth. According to Forbes magazine, back in 2008 they made an extraordinarily smart move – particularly for a couple of unmarried twenty-something guys with no kids. They each transferred a sizable portion of their Facebook stock into a Grantor Retained Annuity Trust (GRAT).

A GRAT is an irrevocable trust that, when well-planned, can be a valuable gift tax savings tool.

The grantor transfers assets – in this case stock that is anticipated to appreciate quickly and significantly – into the trust for a predetermined term of years. Normally, the term of the GRAT is between two and fifteen years. During this term, the grantor receives an income stream, or annuity, from the trust. At the end of the trust term, any assets remaining in the trust go to named beneficiaries. If the value of the retained annuity is sufficiently high, the value of the remainder interest can be zero. The remainder assets are transferred at the end of the term free of gift tax. Often, these remainder beneficiaries are the grantor’s children. Since the Facebook founders are childless, it’s more likely that each of them named a trust as the beneficiary of his GRAT.

The twofold trick to successful GRAT planning is:

1. Choosing the right trust term. If the grantor dies before the trust expires, the trust fails and the assets are included in the grantor’s estate for estate tax purposes. Mark Zuckerberg and Dustin Moskovitz are both 27 years old, so chances are this is not much of a concern.
2. Using the right assets. With a “zeroed-out” GRAT, the grantor’s annuity is equal to the value of the assets transferred to the trust, plus an interest rate assigned by the IRS, known as the Section 7520 rate. When the grantor is projected to regain his initial transfer plus interest, there is no gift tax on the transaction. This is known as a “zeroed-out GRAT”, and it’s what the Facebook founders did. The key to this strategy is funding the trust with assets whose growth is anticipated to outpace the Section 7520 rate during the term of the trust. This way, there are (hopefully significant) assets left over for the remainder beneficiaries, allowing the grantor to transfer wealth and take advantage of the gift tax savings.

According to Forbes magazine’s estimates, the Facebook founders’ GRAT assets are not just poised to appreciate, they’re set to explode. Forbes had its expert crunch the numbers and he came up with these conservative estimates:

If you have clients who could benefit from a GRAT, now might be the time to get them into your office for a discussion. Not only are section 7520 rates favorably low, but the opportunity to use zeroed-out GRATs might be short-lived. President Obama’s proposed 2013 budget would do away with this planning strategy altogether.

Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
www.aaepa.com

The stock market may be shaky and that garners a lot of attention in the press. Of course, low asset values can be great for most estate planning strategies. But, let’s think beyond asset values. Your clients can capitalize on today’s low interest rate environment in their estate planning. By suggesting this (and explaining it to your clients) you can be the estate planning hero.

From January 1991 through March 2009 the Section 7520 rate averaged more than 6.3%, with a peak of 9.4%. The IRS set the rate in October 2011 at just 1.4%.

Interest rates have an impact on the effectiveness of many estate planning strategies. Whether rates are high or low, there are meaningful shifts in the effectiveness of estate planning strategies. Of course, the strategy still must meet the client’s goals and situation.

Interest rates do not affect certain strategies such as Tenancy in Common Fractionalization and Family Limited Partnerships / FLLCs. Other strategies are simply not that interest rate sensitive, such as the Charitable Remainder Unitrust, the Charitable Lead Unitrust, and the Grantor Retained Unitrust.

However, some strategies tend to work much better in a low interest rate environment (like today):

1. Grantor Retained Annuity Trust
2. Sale to Intentionally Defective Grantor Trust
3. Chartable Lead Annuity Trust
4. Loans to Family Members

It may be a very good idea to take a closer look at your client’s estate planning goals and the possible use of these strategies, in light of today’s interest rate environment.

The key message to deliver to your clients is this: “Some strategies work better in a low interest rate environment. Today’s rates are very low; the lowest we’ve seen in generations. It can be to your advantage to shift your estate planning strategies accordingly.”

So, be the hero to your client. Suggest they take a closer look at strategies that take advantage of low interest rates, as well as low asset values.

Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
www.aaepa.com

In 2010, estate planning attorneys have been wondering “what will happen to the estate tax?” We have been wondering whether the pre-EGTRRA estate tax applicable exclusion of $1 million will return or if Congress will finally fix the mess it created years ago. Will the exclusion go back to the $3.5 million we had in 2009 under EGTRRA? Will there be restrictions on GRATs? Will there be restrictions on FLPs?

The intricacies of the estate tax may be in the front of our minds. The estate tax and its strategies may even be of importance to many of our clients. But, seldom is estate tax planning the most important thing we do for our clients. Even with the applicable exclusion at $1 million, most people will not have a taxable estate. But, everyone is concerned about taking care of those closest to them.

We advise clients how to leave assets to their beneficiaries, while minimizing the risk that the assets will be squandered or attached by creditors. We advise clients how to leave assets for their child with special needs, without jeopardizing the child’s governmental benefits. Many of us help our clients with elder law matters, helping them keep their home even in the face of health concerns.

As we approach the holiday season, it’s important to recognize how important we are in the lives of our clients. Our planning enables our clients to make it through very difficult times more easily. We help our clients protect those most important to them from the hardships in life, even when they cannot be there themselves.

Do you have a memorable story to share? Has a client shared how you have made a difference? Please share your story!

Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
6050 Santo Rd., Ste. 240
San Diego, CA 92124
858-453-2128
www.aaepa.com