Amid pressure to close the yawning federal budget gap, congress is mulling over several bills that would significantly narrow the advantages of using grantor-retained annuity trusts to avoid estate and gift taxes.
A GRAT is a popular estate planning device under which a grantor transfers property to a trust and retains the right to an annuity stream for a fixed number of years.
At the expiration of the annuity term, any property remaining in the GRAT passes to designated beneficiaries free of tax, notes Doug Siegler, a tax partner at Sutherland, Asbill and Brennan, Washington, D.C.
If the grantor dies during the term of the GRAT, then the property remaining in the GRAT is included in the grantor’s estate for tax purposes, he explained.
Under current law, the duration of the annuity term and the size of the annuity payments can be set to virtually eliminate any gift tax at the time the GRAT is created, Siegler said.
The House in March passed H.R. 4849, the Small Business and Infrastructure Jobs Tax Act of 2010, which would extend small business tax benefits that expired last December.
To finance the tax credits, the House included three new requirements for a valid GRAT: a minimum term of 10 years, no reduction in the required annuity during the first 10 years of the GRAT, and a remainder interest at inception greater than zero.
The Obama administration estimates changing the rules would raise $4.4 billion in revenue over 10 years. That bill was referred to the Senate Finance Committee.
Rep. Sander Levin, D-Mich., chairman of the House Ways and Means Committee, is pushing for prompt House action, possibly this week, on H.R. 5486, the Small Business Jobs Tax Relief Act of 2010, which contains a similar provision.
It is unclear when the Senate will act on the provision that would change the rules for GRATs, said Sarah Spear, director of policy and public affairs at the Association for Advanced Life Underwriting. One reason for the delay is that the Senate still appears to lack consensus on legislation restoring the estate tax, she said.
Some Senate members want the revenues created by changes to the GRAT requirements to be used to increase the threshold of the estate tax and reduce the maximum tax rate on the estate tax, she said.