GRAT Strategies to Minimize Transfer Tax After Tax Reform and Impact of 2026 Sunset Provisions

Description

A GRAT allows a grantor to contribute assets to a trust but still receive annuity payments over a specified number of years. In a zeroed-out GRAT, the present value of the annuity payments, calculated using the Section 7520 rate, would equal the value of the assets contributed so that no taxable gift is made. However, many factors influence this simple example. Although a grantor escapes gift and estate tax, he continues to pay income tax on the trust's assets, and GST is still a consideration.

To be effective, the grantor must outlive the term of the annuity and, even better, the investments should out-perform the Section 7520 rate. Aside from these somewhat non-controllable aspects, advisers can take concrete steps to increase the value of the residual passing to beneficiaries.

The federal exemption that is now $11.4 million is scheduled to sunset in 2026 if Congress does not act in the meantime. Tax advisers must be aware of the impact of the sunset on transfer strategies to minimize transfer tax.

Listen as our panel helps discern when a GRAT is an effective estate planning tool and provides examples of ways to increase its value, including substituting investments, graduating annuity payouts, rolling short-term GRATs, 2026 GRATs and more.