New York Estate Planning & Elder Law Blog
Grantor retained annuity trust (GRATs) are tremendous tools not just for the ultra wealthy, such as Mark Zuckerberg and the other founders of facebook, it is an estate planning technique that allows for a trust grantor to avoid paying gift taxes on the assets that they place into the trust with the intention that they will pass that asset on to the next generation. They are ideal for any asset that will likely quickly appreciate in value and that will also pay a dividend. Most people automatically think of stocks, which makes sense, but it could also include real estate, patents, trademarks or other intellectual property or even a valuable piece of art or perhaps even valuable machinery or some other object that can be rented.
HOW IT WORKS
To create a GRAT, a person places their property into the trust and pays tax on the property at that time, with the lower value. The trust is structured such that during the life of the trust the grantor received an annuity payment from the corpus of the trust. If the grantor is alive at the end of the trust term, the beneficiary receives the property tax free. The grantor sets the term for a number of years for the GRAT to exist in advance. Basis is a tricky and can be a very beneficial advantage to use of the GRAT because the GRAT allows the grantor to substitute two different assets of the same value but different basis amounts at any time. Since the grantor paid from an annuity during the life of the trust, the grantor still enjoys largely the same benefits.
IDEALLY SUITED FOR QUICKLY INCREASING ASSETS
As such, it is ideally suited really for IT stock or any other stock that will increase drastically. In the case of Mr. Zuckerberg, he placed his pre-IPO stock into a GRAT and when it went public the value of the stock in the GRAT skyrocketed. It is estimated that the federal government lost out on approximately $100 billion dollars over ten years via this legal technique. With a target that large it should come as no surprise that the Obama administration sought to limit the usage of this legal device in budget negotiations. It is taxed based on the following rough formula; the grantor incurs tax liability in the amount of the value of the asset at the time of the creation of the trust, minus any annuity payments that he/she may receive or realize during the life of the trust. It is even possible that the grantor may make a gift that results in zero tax liability. The Tax Court case of Walton v. Commissioner, 115 T.C. 41 (2000) determined that this is more than a theoretical possibility but a realistic possibility, since accounting principles require that a gift made through a GRAT must have a mortality component. That does not mean that no tax liability will result, it simply shifts tax liability.
More so than most other estate tax matters, GRATs are extraordinarily complicated and require an experienced estate planning attorney to counsel the grantor, create the trust and potentially manage it throughout.