Estate Planning With Grantor Trusts: Leveraging GRATs and IDGTs to Minimize Taxes, Preserve and Transfer Assets

Description

For most taxpayers, estate planning should focus on minimizing income tax, while also maximizing the use of the estate tax exclusion. Estate planners should focus on the transfer of assets likely to appreciate, using vehicles that maximize the step-up in basis upon death and allow beneficiaries to avoid hefty capital gains taxes.

Grantor trusts--including GRATs and loans and sales to IDGTs--are two very effective methods for transferring assets and property that will likely appreciate in value to beneficiaries because they allow the grantor to sell or transfer assets to the trust without recognizing a gain.

A GRAT allows a grantor to transfer income producing assets into the GRAT and retain the right to fixed payments for a term of years. When the trust term ends, the remainder interest passes to the grantor's children. So long as the grantor survives the GRAT term, the amount that passes to the beneficiaries is not subject to estate tax.

Another effective technique for transferring wealth to beneficiaries is the sale or transfer of assets into an IDGT. The sale of an asset to an IDGT is not considered a gift event that would trigger gift taxes, and the sale is not considered a taxable event which would trigger any capital gains tax. Also, the sale accomplishes the removal of the asset from the taxable estate. Current low interest rates make GRATs and IDGTs advantageous at this time, but they are not without risks, including mortality risks that will result in the loss of estate tax benefits if the grantor does not outlive the terms of the trust.

Listen as our authoritative panel of estate planning counsel discusses best practices for determining which clients and assets can most benefit from GRATs and IDGTs, maximizing the tax advantages and avoiding the pitfalls associated with each technique.