The 2010 year-end window of opportunity to transfer wealth at a reduced tax cost is open, and now is a good time to do it before Congress considers imposing restrictions.

The opportunity is particularly inviting for those considering establishment of a grantor retained annuity trust (GRAT), according to Estate Planning Opportunities for 2010 Year-End, an alert published November 15 by the law firm Akin Gump Strauss Hauer & Feld LLP.

A GRAT is an estate planning tool that enables a transfer to children or other beneficiaries, at a near-zero gift tax cost, with potential future appreciation earned on property over a specified term. It is successful if the benefactor survives the specified term and the appreciation in value of the transferred property over the term exceeds the relevant IRS imputed interest rate.

A short-term GRAT (two or three years) increases the likelihood of success on both accounts. However, the alert warns that the opportunity to create short-term GRATs may be about to disappear.

Several legislative proposals this year targeted short-term GRATs as a way to raise revenue, and when Congress finally acts on federal estate and generation-skipping transfer taxes, it may impose restrictions on GRATs.

Proposed changes would require:

  • A GRAT to have a minimum term of 10 years;
  • A GRAT’s remainder interest to have a value greater than zero, requiring the grantor to make a taxable gift.

If enacted, the restrictions could be made retroactive to January 1, 2011.

The Akin Gump alert says year-end uncertainty around tax law and congressional inaction has created other potential opportunities and incentives to transfer wealth to heirs in 2010. It discusses these strategies:

  • Make substantial taxable gifts before year-end
  • Maximize annual exclusion gifts.