Florida Estate Planning Lawyer Blog

Senate passes the House proposed extension to the time requirement of 10 years for Grantor Retained Annuity Trusts (GRAT's). This extension is to amend section 2702 of the Internal Revenue Code of 1986. Along with that change, comes the mandate that a GRAT's fixed amount cannot "decrease relative to any prior year" during the first 10 years of the required annuity time period. The third mandate is a GRAT has to have a value greater than zero "at the time of transfer" in order to be valid.

Even though setting up this type of trust may be more risky and more difficult, it may still be a great option for your specific needs. A person wanting to pursue this avenue can still get the benefit of donating large sums of assets to the trust without paying a gift tax on those assets. You should discuss and compare the potential positives and negatives of setting up a GRAT with a Jacksonville, Florida Estate Planning attorney who knows the in's and out's of Grantor Retained Annuity Trusts.

Grantor Retained Annuity Trusts are used in the United States to make large financial gifts to beneficiaries without paying a U.S. gift tax. A GRAT is a trust with a specific life or term, usually anything longer than 2 years. In most cases a wealthy grantor transfers assets to the GRAT and retains an annuity interest in the trust. This means that the grantor receives an annual payment from the GRAT for a fixed period of time. When the GRAT term ends, any remaining assets will be distributed to the named beneficiaries. However, the grantor must outlive the trust term or the funds will fall into the probate estate and subjected to estate taxes.

Recently, the U.S. House of Representatives passed H.R. 5486, a bill that requires all GRATS to have a term of at least 10 years. This is a significant increase from the previous 2 year minimum and significantly dulls the attractiveness of this type of trust. The trust will now be more risky due to the requirement that the grantor must outlive term in order for the beneficiaries to receive the tax breaks from the trust.

The bill has passed in the House and now needs approval from the Senate. This shot period provides a window of opportunity for those who wish to seek the benefits of a GRAT. This is also a great time to review existing GRATs if asset values have declined, so that a GRAT now in place is unsuccessful. If the asset could possibly bounce back and become profitable, now is the time to contact a Florida Estate Planning Lawyer to create a new GRAT.

According to Forbes Magazine the United States has over four hundred billionaires. Currently, three Liberal members of the Senate are working on a plan that calls for a 10% estate "billionaire surtax" that would go into effect retroactively. This would raise the tax rate to 65% on all estates that have accumulated more than $1 billion in assets. These lawmakers believe that billionaires should be required to pay more in estate taxes due to the increasing federal budget deficit and national debt.

This harsh tax proposal may have been spurred by the death of Texas billionaire Dan L. Duncan who passed away in March with a net worth of $9.8 billion. Since Duncan died this year, his entire estate passes to his heirs tax-free. If these Senators' proposal is enacted, it will hit Duncan's estate retroactively, immediately prompting a court challenge to its constitutionality.

Republican Senators and some less liberal Democrats are opposed to any retroactive plan. Seeing that the only way to come up with a legitimate plan is through bipartisan cooperation, two other Senators have been working on a compromise. This would impose estate taxes on estates above $5 million at a maximum tax rate of 35%. If Liberals have their way they would also seek to eliminate or restrict the use of GRATs because those trusts are popular tax breaks for the wealthy. If you have any questions or concerns about how these new laws may effect you contact a Florida Estate Planning Lawyer or Jacksonville Estate Planning Lawyer for assistance.

Given that many GRATS are now underwater and will not likely recover.

Grantor can purchase assets, acknowledge that the GRAT will fail and create a new GRAT with the assets.

If the GRAT contains an annuity payment and the grantor believes that that the underlining asset will still preform over the term of the GRAT, the annuity payments can be taken and new GRATs can be formed with these payments.

There is a potential that the the Code will be reformed and that a 10% remainder will be required. For those concerned about this forming a long term GRAT, at this time, may be a hedge against this risk.

A GRAT or Grantor Retained Annuity Trust is an estate planning technique that minimizes the tax liability existing when transfers of estate assets occur. Under a GRAT, an irrevocable trust is created for a certain term or period of time. The individual establishing the trust pays the taxes associated with income and the transfers. As long as the individual outlives the term of the GRAT then the assets that are transferred go to the beneficiary free of Estate taxes.

GRAT's are typically used with high net worth individual who want to reduce the amount of estate taxes their estate will be subject to.

If you have questions on Grantor Retained Annuity Trusts, Contact a Florida Estate Planning Lawyer to discuss your objectives.