Part of a statement, from Nov. 22, 1995, for the Fred C. Trump Retained Annuity Trust. Part of a GRAT report shown in an illustration accompanying a big New York Times report on Donald Trump’s family’s finances. (Photo: Allison Bell/TA)

A team of reporters at The New York Times may have given wealth planners something new to talk about with clients, by focusing attention on how the father of President Donald Trump used grantor-retained annuity trusts to transfer wealth.

(Related: Meet the Annuity Trust on Bernie Sanders’ Hit List)

The team has suggested, in a special report package that has been making headlines for a week, that Fred Trump, the president’s father, used a GRAT and other arrangements to transfer assets with a value of more than $1 billion to Donald Trump, and to Donald Trump’s siblings, and to reduce the estate and gift taxes on those transfers to $52.2 million, from a potential tax bill that could have been as high as $550 million.

The reporters themselves note that a lawyer for Donald Trump has said that there was no fraud or tax evasion by anyone, and that the reporters had based false allegations on extremely inaccurate accounts of the facts.

What is a GRAT?

A wealthy individual, or “grantor,” can use a GRAT to convert assets into annuity income.

The grantor puts assets in and takes annuity income out.

When the grantor dies, the beneficiaries can get the value of the assets still in the GRAT without paying estate or gift taxes on those assets.

GRATs and Asset Valuations

A GRAT will perform better if the value of the assets inside the GRAT increases dramatically while the assets are inside the GRAT.

The Times reporters allege that the architects of the Trump family GRAT strategy enhanced GRAT performance by getting unrealistically low valuations of the assets placed inside the GRAT.

Minority Interests and Majority Interests

The Internal Revenue Service assumes that someone who owns the majority of a company, and controls it, has a more valuable asset than someone who owns a minority stake in the same company. If, for example, John Doe has a 100% stake in a company with an appraised value of $10 million, his stake might be worth $10 million. If he gives a 25% stake in the same company to each of his four children, their combined stake might be worth only $8 million.

The New York Times says the Trump family reduced its tax liability by converting Fred Trump’s 100% interest in his operations into minority interests, split among his children, right before the assets were put inside the GRATs.

Implications for Financial Professionals

The Times reporters do not suggest in the article that use of a GRAT is illegal; they simply question the valuation of the assets put in Fred Trump’s GRAT, and they raise questions about how the company ownership interests inside Fred Trump’s GRAT took the form of minority interests.

The takeaway for wealthy clients might be that a GRAT can be a powerful vehicle for reducing estate and gift taxes.

Policymakers have called for changes in the rules governing GRAT asset valuations. Sen. Bernie Sanders, for example, has proposed GRAT asset valuation changes as one of the possible “pay fors” for paying for a shift to a pure government-run health care finance system. But making changes in GRAT rules could take years, and changes in federal tax rules generally grandfather in taxpayers who have set up arrangements under the old tax rules.

— Read 5 Trump Group Long-Term Care Insurance Plan Factson ThinkAdvisor.

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