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This is the 20th in a series of 23 tax tips that AdvisorOne is publishing on each business day in March as part of our Tax Planning Special Report (see our Special Report calendar for a more complete list of topics to be covered and experts who will deliver their insights).
The tax tip today comes from Benjamin Ledyard (below), director of Wealth Strategies and regional director of the Mid-Atlantic for Silver Bridge Advisors. During his 15 years of experience in wealth management, he has developed expertise in financial, tax, wealth transfer, risk management, investment oversight, family governance, business succession, executive benefits and philanthropic planning.Ledyard holds aJD from Widener University School of Law and a bachelor’s degree from the University of Delaware.
The Tip: Look Into the GRAT Gift Strategy
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, whose provisions became effective Jan. 1, reenergized a number of opportunities for families and individuals to transfer wealth. The temporary rise of the lifetime gift exclusion from $1 million to $5 million makes gifting strategies an important area to focus on to take advantage of this window.
Similar to a qualified personal residence trust (QPRT), another even more familiar—or notorious because it has been subject to four attempts by Congress to amend one of its key features—is the grantor retained annuity trust (GRAT). This is similar to a QPRT, but instead of living rent free, the grantor receives an annuity from the assets placed in the trust during its term. GRATs are especially attractive to those who are reluctant to gift an asset, say a bond portfolio, because they may need the income stream.
Ledyard says there are two reasons to explore GRATs right now. The increase in the gift tax exemption makes GRATs a more viable technique for clients who want to make larger asset transfers without triggering a tax and to receive an annuity for a period of time. And with government interest rates extremely low at present (the Applicable Federal Rate was 3% for March 2011), the grantor is able to lock in low rates for the term of the trust. The measure of the gift is the amount put in the trust, minus the annuity plus the interest rate factor.
A second reason to look at GRATs now is that they are under attack on Capitol Hill. Ledyard notes that during its just-ended term, Congress came close to imposing a 10-year term limit on GRATs, and President Obama’s February budget message again called for the same term limit. Ledyard explains that GRATs are generally short term, two or three years, because the biggest risk attending a GRAT is the death of the grantor during the trust term, in which case the assets in the trust are pulled back into the taxable estate. A 10-year limit would effectively remove this technique from the estate planning arsenal.
See ourTax Planning Special Report calendar for a list of future topics to be covered.