California Probate - Law Offices of Janet Brewer Blog

How Can I Protect Assets from Creditors?

“Estate planning is not just about saving taxes, it is also about managing and protecting your assets against future creditors, both for you and for your beneficiaries.”

Forbes’ recent article entitled “Three Estate Planning Techniques That Protect Your Assets From Creditors” explains that the key to knowing if your assets might be susceptible to attachment in litigation is the fraudulent conveyance laws. These laws make a transfer void, if there’s explicit or constructive fraud during the transfer. Explicit fraud is when you know that it is likely an existing creditor will try to attach your assets. Constructive fraud is when you transfer an asset, without receiving reasonably equivalent consideration. Since these laws void the transfer, a future creditor can attach your assets.

Getting reasonably equivalent consideration for a transfer of assets will eliminate the transfer being treated as constructive fraud. Reasonably equivalent consideration includes:

1. Funding a protective trust at death to provide for your spouse or children
2. Asset transfer in return for interest in an LLC or LLP; or
3. A transfer that exchanges for an annuity (or other interest) that protects the principal from claims of creditors.

Limited Liability Companies (LLCs) can be an asset protection entity, because when assets are transferred into the LLC, your creditors have limited rights to get their hands on them. Like a corporation, your interest in the LLC can be attached. However, you can place restrictions on the sale or transfer of interests that can decrease its value and define the term by which sale proceeds must be paid out. An LLC must be treated as a business for the courts to treat them as a business. Thus, if you use the LLC as if it were your personal property, courts will disregard the LLC and treat it as personal property.

Annuities are created when you exchange assets for the right to get payment over time. Unlike annuities sold by insurance companies, these annuities are private. These annuities are similar to insurance company annuities, in that they have some income tax consequences, but protect the principal against attachment.

You can also ask an experienced estate planning attorney about trusts that use annuities, which are called split interest trusts. There is a trust where you (the Grantor) give assets but keep the right to receive payments, which can be a fixed amount annually with a Grantor Retained Annuity Trust (or GRAT.)

Another trust allows you to get a variable amount, based on the value of the assets in the trust each year. This is a Grantor Retained Uni-Trust or GRUT. If the assets are vacant land or other tangible property, or being gifted to someone who’s not your sibling, parent, child, or other descendant, you can keep the income from the assets by using a Grantor Retained Income Trust (or GRIT).

Along with a trust where you make a gift to an individual, you can protect the trust assets and get a charitable deduction, if you make a gift to charity through trusts. There are two types of trust for this purpose: a Charitable Remainder Trust (CRT) lets you keep an annuity or a variable payment annually, with the remainder of the trust assets going to charity at the end of the term; and a Charitable Lead Trust (CLT) where you give a fixed of variable annuity to charity for a term and the remainder either back to you or to others.

To get the most from your asset protection, work with an experienced estate planning attorney. Contact our office today to schedule your consultation.

Reference: Forbes (June 25, 2020) “Three Estate Planning Techniques That Protect Your Assets From Creditors”

2020 Offers a Temporary Increase in Exemptions from Estate and Gift Taxes: Why You Should be Taking Advantage of This Limited Time Exclusion

The Tax Cuts and Jobs Act was signed into law on December 22, 2017, and it continues to provide extraordinary opportunities for those who are planning for their estate. One of the most significant benefits gained through this Act was the temporary increases in exemptions on gift and estate taxes.

Changes in the Act

Currently, transfers of property that occur during one’s life or upon death in excess of the gift and estate tax exemption limit – which was $5,490,000 - are taxed at the federal rate of 40%. However, the Act doubled this exemption amount for a limited amount of time. Between January 1, 2018, and January 1, 2026, the federal estate, gift, and generation skipping transfer exemption amount is set at $11,180,000. This exemption limit is doubled for married couples.

This change means that individuals can leave a lot more of their wealth and assets to family members without incurring a tax rate of 40%. But it is crucial to understand that these exemption limits are only temporary; without another statutory change, the limits will revert to $5,490,000 after the January 1, 2026 deadline has passed.

Despite this, the IRS announced that individuals who use the exemption between 2018 and December 31, 2025, will not be adversely affected when the exemption reverts to its former level. They have determined that there would be no ‘clawback’ of gifts made by individuals during the defined period, even if the lifetime exemption amount is subsequently decreased.

There were no changes to the provisions that allow gifts of any amount for health care or education to be excluded from the gift tax. These payments must be made directly to the educational institution or medical provider, though.

Benefits of Estate Planning Now

Due to the changes made in the Act, estate planning activities, and asset transfers that occur during this time can be incredibly advantageous for families who are trying to keep more of their assets. And it is far better to consider taking action sooner rather than later to ensure that securing these benefits isn’t put into jeopardy by another legislative action.

For individuals who have previously reached the $5,490,000 gift tax or generation-skipping transfer tax exemption, they now have the opportunity of gifting another $6,090,000 (or double this in cases of married couples) to family members. Individuals can also bestow gifts within these limits to grandchildren or more distant descendants without incurring the 40% tax rate.

The increase in federal exemptions provides individuals with opportunities to retain more control of their assets for generations to come. In addition to this, the annual exclusion gifting amount has remained steady in 2020 at $15,000 per donee (or $30,000 per donee if spouses split gifts), which remains subject to indexing in future years.

The increase in the exemption amount open opportunities to employ several techniques that can maximize a family’s control over its wealth, including:

• Allowing those who have previously reached the limit to double their amount of gifts, including those made to generation-skipping trusts.
• Selling assets to intentionally defective grantor trusts (IDGT), which allow the grantor to continue making tax-free gifts to the trust.
• Creation of a Dynasty Trust, which is a perpetual trust that is intended to last for many generations, usually beyond the individuals’ lifetime.
• Making intra-family loans or cast gifts to operate as a prepayment of existing loans from senior family members.
• Employing a Grantor Retained Annuity Trust (GRAT) to remove appreciation from your taxable estate.

Considerations for Estate Planning

While it is clear that undergoing estate planning activities and transferring any additional wealth and assets now is one of the biggest actions you can take to make a positive impact on your family’s financial future, there are several other considerations to keep in mind.

The federal exemption is the only one impacted by this change; state tax law can vary from state to state - some of which altered their existing gift and generation-skipping transfer limits, while others didn’t. If you are uncertain about your state gift tax limits and rates, you should contact an estate planning attorney for more information.

But perhaps the most significant thing to remember is that the increased exemption limit is temporary. It has an expiration date, and while it may seem like you have plenty of time to reduce your taxable estate, it’s important also to realize that one-quarter of the allotted time for this temporary change has already lapsed. While you had eight years to make changes on January 1 of 2018, you have less than six years left to take action. If you haven’t done so already, it’s time to begin or expand upon your estate planning activities to ensure that you are optimizing your transfers of wealth.

GRAT? What’s That? The Basics You Need to Know

In Silicon Valley, GRATs are an increasingly popular estate planning tool that come with significant potential tax savings. If you are unfamiliar with the grantor retained annuity trust, learn about the basics of how to use it in your estate plan.

What Is a GRAT?

The term GRAT stands for grantor retained annuity trust. Grantor refers to the person who creates the trust. For this type of trust, the grantor receives an annuity payment for a short amount of time after the trust is formed, usually two to five years. After the annuity payments end, the trust gives all remaining trust assets to the beneficiaries. The beneficiaries are usually children or grandchildren.

The IRS may assess taxes on the gift the grantor makes through the GRAT to beneficiaries. Rather than basing taxes on the assets’ value when they were placed in trust or their value at the time the annuities stop, the IRS considers two factors:

• The amount of the annuity that the grantor takes back; and
• The rate of return that the trust is expected to earn while annuities are paid.

The rate of return is known as the 7520 rate, and it is based on what U.S. Treasury bonds are paying when the grantor sets up the GRAT. These two factors help the IRS calculate a “gift value” of the assets that the grantor places in the GRAT. The IRS uses the gift value to determine if taxes are due.

How Can You Use GRATs in Your Estate Plan?

People in tech love to create GRATs to hold startup stock in preparation for an IPO. If you set the total annuity payment amount to equal the amount the grantor originally contributed to the trust plus some interest, then the IRS will set the gift value at zero. As a result, the grantor will not owe gift taxes on the assets placed in the GRAT.

The assets may appreciate in value significantly over the trust term, however. This often happens when startups have their IPOs and stock values rise. As a result, the beneficiaries may receive something of far greater value than zero. But the grantor will not have to pay gift taxes. (See Walton v. Commissioner, 115 T.C. 589 (2000).) If you would like to make a gift of startup stock and already have significant gift tax liability, consider starting a GRAT.

Planning your estate? Look to Janet Brewer, Esq. for thorough and thoughtful estate planning advice. Janet’s more than 20 years of legal experience will give you confidence and peace of mind. To schedule a “Get Acquainted” meeting, visit Janet's website or call her office at (650) 469-8206.

Grantor or Non-Grantor Trust?

The IRS sets the rules and regulations, which are complicated.

The differences between a grantor trust and non-grantor trust can often be key in estate planning. This is because they carry important tax implications. A grantor trust is one in which the person who created and funded the trust remains in control of it and the non-grantor trusts can be used to lower state income taxes.

Qualifying as a non-grantor trust requires that the grantor and the grantor's spouse do not have beneficial enjoyment of trust property under Section 674 but there are some very important and useful exceptions to that rule, according to Wealth Management in "The Perils and Pitfalls of Grantor Trust Triggers."

Among the important issues are:

• A reasonable definite standard limits the ability of the trustee to make distributions from the trust. This is known as the "HEMS" exception, since the standard can be health, education, maintenance or support.
• If a trust has multiple beneficiaries who each receive distributions of income and principle on a pro rata basis, it is an exception.
• If a trust has only one beneficiary, income and principle must be paid on a definite schedule to that beneficiary for the trust to be an exception.
• Neither the grantor nor the grantor's spouse are a trustee, nor are more than 50% of the trustees in a subordinate position to them.

Reference: Wealth Management (June 19, 2018) "The Perils and Pitfalls of Grantor Trust Triggers."

Locking in Lower Interest Rates

Different kinds of trusts can help with the challenge of rising interest rates.

It is likely that at some point in the near future, interest rates will rise leading to potential problems for some estates, according to the Wills, Trusts & Estates Prof Blog in "Wealth Transfer Strategies for a Rising Interest Environment."

There are a couple of different types of trusts that can help to mitigate rising interest rates.

The first type of trust is called a Grantor Retained Annuity Trust (GRAT). This is an irrevocable trust.

Assets are placed in the GRAT and the settlor of the trust receives a regular annuity from the trust.

When the settlor passes away, all of the assets in the trust, minus interest, pass to the trust beneficiaries tax free.

The second trust is called a Charitable Lead Annuity Trust (CLAT). This is the same thing as a GRAT, except that the annuity payments go to charity.

When looking at these trusts, the IRS establishes an interest hurdle.

Any growth below the hurdle goes to them. Any growth over it, goes to the beneficiaries. That means when interest rates rise, the trust beneficiaries get more.

GRATs and CLATs are complicated trusts that must be handled in specific ways to pass IRS review.

An estate planning attorney can advise you in creating an estate plan that fits your unique circumstances, which may include protection from higher interest rates. We can help you with these complicated issues, contact us today for a free consultation.

Reference: Wills, Trusts & Estates Prof Blog (August 23, 2017) "Wealth Transfer Strategies for a Rising Interest Environment."

Business Succession Planning Has Various Options

Whether you wish to continue to own your business until you pass away or pass it on during your lifetime, there are different options to meet your goals.

There are a variety of options available to accomplish business succession as recently discussed in the Insurance Journal article "Gifting Agency Stock & Grantor Retained Annuity Trusts

Business succession planning is sometimes considered merely part of the general planning for the owner's estate. However, many people who have family businesses prefer to have younger family members run the business long before the current owner passes away. Those owners seek options for other family members to gain ownership of the business in a cost-friendly way.

The options discussed in the article are:

• Gifting – A business owner can take advantage of the gift tax exemption and give stock in the company to other family members. This would need to be done with a careful plan over many years as the individual gift tax exemption in a single year is only $14,000. Owners must also be aware of the lifetime gift tax exemption of $5.45 million (double for married couples), which makes gifting an entire business away only an option for smaller companies.
• Grantor Retained Annuity Trusts – These are fairly complicated trusts that should only be considered with the advice of an attorney. They allow a business owner to transfer ownership to the trust and receive an annuity for a set period of time. After that time runs out, the assets in the trust transfer to the trust beneficiaries.

An estate planning attorney can guide you through your options on business succession.

Reference: Insurance Journal (May 23, 2016) "Gifting Agency Stock & Grantor Retained Annuity Trusts."

You Can't Take it With You: Giving Now Reduces Tax Liability

There is a grain of truth in every cliché and that is particularly true of these two:

• Money. . .You can’t take it with you; and
• It’s better to give than to receive

In the context of estate planning, I encourage all of my clients to consider these old adages.   Whether you are extremely wealthy or only moderately so, it’s important that you enjoy the fruits of your labor while you are alive because after you are dead, you have absolutely no use for your money.  And you certainly won’t be able to enjoy it from the grave.

The larger your estate, the more estate taxes your heirs pay

Now, you may be thinking about your heirs and the fact that you want to leave something for them to enjoy once you’ve passed on.  That’s a common consideration for just about all of my clients.  But here’s the kicker.  The larger your estate, the more estate taxes and gift taxes your heirs will have to pay after you die.  So, spending some of your money now will actually benefit your heirs by reducing their exposure to estate and gift taxes.

Gifts up to $13,000 per year are tax free

What if I told you there is a way to benefit your heirs and other loved ones now, before you die, and simultaneously reduce their exposure to estate and gift taxes?  Well, there is and it’s by giving while you are still alive.  Under current law, you can give any person up to $13,000 per year, without paying taxes.  You can also give an additionl $1 million collectively to all of your heirs without taxes [assuming you’re a US citizen – if not, see my articles on international estate planning].

Example

Let me illustrate.  Suppose you have 3 chldren and 7 grandchildren.  You can make annual gifts to them of $130,000 ($13,000 x 10).  If they’re married, you can double that amount.  Let’s assume you also decide to give them an additional one-time gift of $100,000 each ($100,000 x 10 = $1 million).  You will have given them $1,130,000 without paying any taxes.

Assume that instead of giving them $1,130,000 that you die in 2011 with an estate worth that amount.  Because of the way that the estate tax laws work, they will pay approximately $53,300 in estate taxes and receive only $1,076,700.

Think about it. . .if you leave your heirs $2 million dollars when you die, they will receive only $1,565,000 if the estate tax comes back as scheduled.  So, it just makes sense to give as much as you can afford to give while you are alive.  By giving now, you benefit your heirs while at the same time reducing your estate, thus reducing your heirs’ tax liability.

Gift tax rate expected to jump to maximum rate of 55%

In fact, I advise some of my clients to give more than $13,000 per year.  Considering that the current gift tax is relatively low (35%), now is a perfect time to give more than you might ordinarily give and to simply pay the tax.  Next year the gift tax is expected to jump to a maximum rate of 55%; therefore, it just makes sense from some clients to give more than $13,000.

GRAT facilitates asset transfers

In addition to making $13,000 gifts, you can use other estate planning techniques to reduce exposure to tax liability.  One such technique is the grantor-retained annuity trust (GRAT).  The GRAT allows you to transfer assets that you expect will appreciate in value into a trust and to receive periodic payments from the trust for a minimum of two years.  Appreciation or gains in the assets placed in the trust go to the trust’s beneficiaries tax-free (caution: as they say in certain circles “some restrictions apply”)..

There is a strong possibility that the laws governing GRAT’s will soon change, making them far less beneficial for avoiding tax liability.  If this speculation is correct, Congress may extend the minimum terms to ten years and make the distributions taxable.

Consider the intra-family loan option

Another option that I advise my clients to consider is the intra-family loan.  The interest rate on intra-family loans is set by the government and currently stands at 0.53% for loans of three years or less.  However, if the government believes that the “loan” is really a gift, it will be taxed as such if it exceeds the $13,000 limit.  Therefore, it’s important to treat the loan as a loan by putting it in writing and requiring strict adherence to its terms including on-time payments and imposition of late fees when payments are not made on time.

Asset Protection: 7 Ways to Protect Your Assets From Creditors

When planning your estate, your primary objective is probably to pass on as much wealth to your heirs as possible. And if you’re like most people, you want to reduce or eliminate estate taxes as well.

But litigation, divorce, malpractice and other potential claims may damage your net worth more than taxes. So protecting assets from potential claims has become an additional planning objective. Fortunately, many of the same techniques you can use to reduce estate taxes also can provide creditor protection.

You can use many techniques to reduce your estate for tax purposes while also protecting your assets from creditors. Yet these measures won’t protect against existing creditors if a transfer constitutes a “fraudulent conveyance” under the Uniform Fraudulent Transfer Act. A fraudulent conveyance occurs if you had actual intent to hinder, delay or defraud a creditor when you made the transfer.

Here are seven ways to safely protect transferred assets from creditors:

1. Outright gifts. An outright gift protects a transferred asset from creditors. But you’ll lose all economic interest in and control over the asset

2. Family limited partnerships (FLPs). An FLP is an excellent asset-protection device because it limits a limited partner’s creditor’s ability to attach partnership assets to satisfy a debt. Creditors generally can obtain a charging order only against a limited partner’s interest in a partnership. A charging order would permit a creditor to receive distributions only when they’re made from the partnership, and the general partner could choose not to make distributions. The creditor could even end up with taxable income without any cash distributions.

3. Irrevocable life insurance trusts (ILITs). From the standpoint of protecting your assets, an ILIT removes insurance proceeds from your estate for federal estate tax purposes. And the trust protects from creditors the cash value of the policies during your lifetime and the policy proceeds when you die.

4. Qualified personal residence trusts (QPRTs). A QPRT lets you transfer a primary or vacation residence to a trust while you reserve the right to live in the home for a term of years. The value of the interest you retain (that is, the right to live in the house for a term of years) is calculated using IRS tables. The value of the property transferred into trust, minus your term interest’s value, is a gift known as the “remainder interest.” This gift can be sheltered from gift tax by your $1 million gift tax exemption. If you survive the term of years, the trust is not included in your estate for federal estate tax purposes. (QPRTs provide creditor protection by insulating the residence from your creditors’ claims. In a creditor protection situation, the nondebtor spouse should create the QPRT and retain the term interest.)

5. Inter vivos qualified terminable interest property (QTIP) trusts. You create this trust during your lifetime for your spouse. It qualifies for the gift tax marital deduction. The federal estate tax benefit to this technique is that when your spouse dies, the QTIP trust is included in his or her estate for federal estate tax purposes. If your spouse lacks sufficient assets in his or her own name to use his or her federal estate tax exemption, the QTIP assets will achieve this.

If you survive your spouse, an amount of assets equal to the estate tax exemption (currently $1.5 million) will first go to fund a family trust created under the QTIP trust for your benefit. The balance of the QTIP trust assets will be allocated to the marital trust for your benefit and will qualify for the marital deduction, resulting in no federal estate tax at your spouse’s death.

By structuring the QTIP trust this way, the assets allocated to the family trust when your spouse dies will escape estate tax. That is, the assets allocated to the family trust don’t qualify for the estate tax marital deduction, but your spouse’s estate tax exemption “shelters” them from estate tax. They also won’t be subject to federal estate tax when you die, because assets allocated to a family trust — including their appreciation — for a surviving spouse’s benefit aren’t part of the surviving spouse’s estate for federal estate tax purposes.

The inter vivos QTIP trust is extremely popular as a creditor protection device because the QTIP assets are completely insulated from claims of your creditors and your spouse’s creditors during your spouse’s lifetime.

6. Charitable remainder trusts (CRTs). A CRT usually provides for distribution of a percentage of the trust principal, at least annually, to a person, usually the grantor, for his or her lifetime. The CRT can provide that when the grantor dies, the grantor’s spouse shall become the CRT annuitant for his or her lifetime. When this period ends, the charity receives the remaining CRT assets (the “remainder interest”).

Creating a CRT provides several income tax benefits. For example, the grantor can deduct the remainder interest’s value (the interest passing to the charity) as determined at the CRT’s inception by consulting IRS tables.

An additional benefit is that the CRT is exempt from all income tax. So a grantor owning assets subject to a large capital gain can transfer these assets to the trust, and it can sell them without the grantor or the trust having to pay any tax on the gain. Or a grantor holding highly appreciated assets that aren’t producing much income can contribute them to the CRT and create an income stream and owe tax only as annuity payments are received. It sells them and reinvests the proceeds to service the annuity.

A nondebtor-spouse-created CRT protects assets from a debtor spouse’s creditors. A creditor can’t attach the principal because of the charitable interest. And a debtor spouse’s creditors can’t attach the nondebtor spouse’s annuity payments. If the nondebtor spouse dies first — and the CRT provides that the debtor spouse becomes the annuitant — the debtor spouse’s creditors could attach the annuity when distributed to him or her.

7. Grantor retained annuity trusts (GRATs). A GRAT is a gift of a remainder interest in an irrevocable trust, under which the grantor has retained an annuity interest for a term of years. For example, if $500,000 is transferred to a GRAT and the grantor has retained a 6% annuity, $30,000 per year will be distributed to the grantor. The remainder interest in the GRAT can be a trust for the grantor’s spouse, with trusts being created for children when both spouses die.

The value of the gift to a GRAT for gift tax purposes is the value of the property transferred to it, less the value of the grantor’s retained annuity interest. The value of the annuity is calculated according to IRS tables.

If the grantor survives the GRAT’s term, its assets will be excluded from the grantor’s estate for federal estate tax purposes. If the grantor dies during the term, some of the assets will be included in the grantor’s estate for federal estate-tax purposes.

If a nondebtor spouse is the grantor of a GRAT, the debtor spouse’s creditors can’t attach the annuity distributions to the nondebtor spouse. These creditors also can’t attach the GRAT principal. If a debtor spouse becomes a GRAT beneficiary when the nondebtor spouse dies, his or her creditors could attach any distributions to the debtor spouse.

Many options

These are just a few of the ways proper estate planning can also safeguard your assets from creditors. And in a society rife with litigation, you simply can’t underestimate the importance of protecting yourself. Learn all you can about these measures and others that may benefit you.

Grantor Retained Annuity Trusts (GRAT)

Innovative technique may eliminate a GRAT’s mortality risk

One of the most tax-efficient vehicles for transferring wealth to your family is a grantor retained annuity trust (GRAT). Plus it provides you, the grantor, with an income stream. But there’s a major drawback to this estate planning strategy: If you don’t survive the trust’s term, the assets are included in your estate and taxed as if you had never created the trust.

Over the last few years, a number of estate planners have begun using an innovative new technique — the guaranteed GRAT — in an effort to eliminate this mortality risk. This strategy is designed to let your family take advantage of a GRAT’s substantial tax benefits without worrying the benefits will be lost if you die unexpectedly.

Keep in mind, however, that guaranteed GRATs have not yet been accepted by the IRS or the courts. Before using this strategy, be sure to discuss the pros and cons with your estate planning advisor.

GRAT basics

A GRAT is an irrevocable trust you fund with a one-time contribution of assets. The trust pays you an annuity for a specified number of years, and at the end of the term any remaining assets are transferred tax-free to your children or other beneficiaries.

The annuity can be a fixed percentage of the initial contribution’s value or a fixed dollar amount. You also may design it with predetermined increases. You must report the annuity payments on your individual income tax return.

Gift tax savings

A GRAT’s tax-saving power lies in its ability to minimize or eliminate gift tax. The present value of the heirs’ remainder interest in the trust assets is subject to gift tax. That value is determined using the Section 7520 interest rate, published monthly by the IRS.

The annuity amount can be designed to minimize the value of the remainder interest — or even eliminate it altogether (a so-called “zeroed-out GRAT”) — for gift tax purposes. Then any actual appreciation beyond the IRS’s “assumed rate of return” passes to the heirs tax-free. (See the sidebar “GRATs are great in a low interest rate environment” for an illustration.)

The key to reducing gift tax with a GRAT is to fund the trust with assets you expect to outperform the Sec. 7520 interest rate, such as real estate or securities with great appreciation potential. A GRAT also can be a viable strategy for transferring assets that are subject to valuation discounts, such as limited partnership interests or closely held business interests (especially if the company may be sold or go public in the future).

The guarantee

As discussed earlier, if you don’t outlive its term, assets remaining in the trust will be included in your taxable estate. To avoid this downside, consider creating a guaranteed GRAT. How?

First, you establish a GRAT and retain a contingent reversion interest, which means that if you don’t survive the term, the remaining trust assets will be paid to your estate. Shortly after you form the GRAT, you and your children enter into an agreement for them to purchase the equivalent of your contingent reversion interest at fair market value. Because the purchase price is set at the time you draft the GRAT, it should be only a fraction of the value of the assets your children ultimately receive.

If you die before the end of the trust’s term, the remaining assets are distributed to your estate, but under the purchase agreement, the estate is contractually obligated to pay an equal amount to your children. Even though the assets are included in your estate, the estate is entitled to an offsetting estate tax deduction for the amount it’s required to pay to the children. In effect, the children receive the remaining trust assets tax-free as if you had outlived the trust.

Exercising caution

Properly structured, this strategy lets your family take advantage of a GRAT’s substantial tax benefits without worrying the benefits will be lost if you die unexpectedly.

A guaranteed GRAT can give you peace of mind that your family will be able to take advantage of your GRAT’s tax benefits if you die suddenly. But like any new estate planning technique, the guaranteed GRAT is relatively untested, so it’s important to consider potential risks of an IRS challenge. And keep in mind that traditional GRATs also are subject to complex rules and regulations, so careful planning is necessary.

GRATs are great in a low interest rate environment

Grantor retained annuity trusts (GRATs) can be especially attractive when interest rates are low. Let’s take a closer look at an example that illustrates why.

Susan, age 60, transfers $2 million in assets to a five-year GRAT that provides for five annual annuity payments of $449,000 (22.45% of the value of the initial contribution). At the end of the term, the remaining assets pass to Susan’s daughter, Caroline. Assume that the Section 7520 rate for the month the GRAT is established is 4%, and the actual rate of return on the assets is 10%.

Based on the assumptions, the gift tax value of the transfer is $65,484 even though nearly $500,000 is transferred to Caroline. The gift is potentially significantly less in light of a recent decision involving the Sam Walton family. It’s still too early, though, to rely on that decision. Please contact your professional advisor to help you determine how this decision may affect your estate plan.