A Grantor Retained Annuity Trust (GRAT) can be an effective means for transferring high-yielding and/or rapidly appreciating assets to children and other beneficiaries with minimal estate and gift tax consequences. A GRAT’s success depends on whether its assets outperform a certain rate (known as the “7520 rate”) set by the IRS. The 7520 rate has fallen to an exceptional low: 1.8% for GRATs funded in March 2015. Consequently, now is the time to consider creating one or more GRATs as part of your estate plan.
This opportunity may not last. In addition to the likelihood that the 7520 rate will increase as market interest rates begin to rise, the Administration’s current budget proposal includes provisions that could limit the attractiveness of GRATs by requiring that the term of a GRAT be at least 10 years. Because the creator of a GRAT must survive the term of the GRAT for the GRAT to succeed, it is common to use terms shorter than 10 years.
Taft’s Private Client attorneys are available to help you analyze opportunities like GRATs for tax savings and to address issues with respect to estate, gift and generation-skipping transfer tax planning. We encourage you to contact us with any questions.