A post over at Think Advisor last week provides some helpful insight into one financial and estate planning tool which might be appropriate for some New York residents. The tool is know as a GRAT – Grantor Retained Annuity Trust. As with many other trusts, one key purpose of the GRAT is to minimize tax liability, particularly for those with significant assets.
How It Works
The basic concept behind the GRAT is straightforward. Assets are placed in trust. The grantor (person creating the trust) then retains the right to receive fixed payments from the trust. Those payment can last either for a set period of time designated in advance or over the grantor’s life. At the end of the trust’s life the assets placed in the trust then fall to the beneficiaries.
Timing: Why to Consider it Now
Grantor Retained Annuity Trusts have been available for quite some time. However, there has been a push by some in recent years for increased use of the GRAT. This renewed interest is based two factors, current interest rates and the political dynamic which may close the window of their availability.
1) Interest Rates – For the past few years, interest rates have been quite low. As financial advisors often explain, a GRAT can be particularly valuable in a low interest rate environment. Here’s why: the ‘taxable” portion of the transfer into the GRAT is based on the value of the property minus the estimated value that the grantor will retain as part of the annuity. The larger the retained estimate, the lower the taxable amount. Therefore, in a low interest rate environment, the portion of the transfer that is taxable will ultimately be lower. As the Think Advisor article points out, in some cases, this scenario can effectively reduce a tax liability to zero.
2) Politics – On top of the benefit with today’s interest rates, there may be a push for use of GRATs now because the ability to use this tool may be taken away. Recent federal proposals have included elimination of the benefits available in these types of trusts. Therefore, if the GRAT is a good fit in your situation, it is important to act now.
There are many other issues to consider with regard to GRATs, like the possible need to combine with a life insurance trust. For help understanding the many different types of financial and estate planning tools that might be available to meet the needs of your family, please contact our estate planning attorneys today.