23 November 2010

December 2010 is the best month to create a grantor retained annuity trust


DECEMBER 2010 IS THE BEST MONTH TO CREATE A GRAT: 7520 RATE IS 1.8%

December could be the best month (ever) to create a grantor retained annuity trust (a “GRAT”). 

A GRAT is a trust to which a grantor contributes property and retains a stream of annuity payments for a period of years.  If the grantor survives the term, value remaining after the annuity payments have been made is passed on to the beneficiaries.  One of the benefits of a GRAT is that it can be structured so that no gift tax is due on creation.  The IRS requires that the value of the annuity payments be determined using its published interest rate (known as the 7520 rate) in effect for the month when property is contributed to the GRAT.  In December this rate will be the lowest ever at 1.8%. 

The benefit of a low 7520 rate is that if the donor survives the trust term and the assets produce a return in excess of the published rate, the excess appreciation is passed to the beneficiaries free of gift and estate tax.  For GRATs created this December, trust assets need only appreciate at a rate in excess of 1.8% to ensure that property will be available to pass to beneficiaries with no gift tax. 

Clients should be aware there are multiple bills pending in Congress that could significantly curtail the use of GRATs as planning vehicles. 

Because of the low 7520 rate and the possibility of Congressional action that could cause planning with GRATs to be less advantageous, if you have ever considered creating a GRAT, or if you have never considered one before, December may be the perfect month to implement this planning opportunity. 

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