During an economic recession, many people tighten their
belts and look for ways to save money. Often, one of the first things they
remove from their “to do” list is estate planning. There are, however, a couple
of estate planning techniques that work particularly well during a recession
and in an era of low interest rates. Spending money on these estate planning
techniques now can be an excellent way to transfer assets from an individual’s
estate, saving estate and gift taxes. Those interested in passing wealth to
younger generations or charitable organizations have a couple of options.
One is a grantor retained annuity trust (GRAT), an estate
planning technique that allows an individual to transfer appreciated assets
with minimal or no gift tax. The creator of the GRAT transfers assets to the
trust for a set term of years. During the term of the trust,
the transferor receives an annual annuity payment of a fixed dollar amount
or percentage of the fair market value of the trust assets. If the
individual creating the GRAT survives the trust term, the remaining trust
assets (if any) are distributed to the remainder beneficiaries of the trust
(typically the grantor’s children).
The goal of a GRAT is to transfer assets that have the potential
for appreciation at a rate greater than the rate the Internal Revenue Service
establishes for the purpose of valuing the annuity paid to the grantor. If the
assets appreciate at a greater rate, then, at the end of the GRAT, there will
be assets remaining in the trust that can be paid over to the trust
The individual creating the GRAT is deemed to make a taxable
gift equal to the fair market value of the property transferred to the GRAT,
less the value of the annuity payments paid during the trust term. The GRAT can
be structured so that the gift is very small, by making the annuity payments
roughly equal to the value of the property transferred to the GRAT.
Because the Internal Revenue Service rate for GRATs is low
and the value of many assets held by individuals is also relatively low, a GRAT
can be a useful technique to transfer potential appreciation in an asset at a
very low gift tax cost.
A Charitable Lead Annuity Trust (CLAT) is another estate
planning technique that works well in a low interest rate environment. A
CLAT is a trust that provides for a payment of a fixed dollar amount to one or
more charitable beneficiaries for a specific period of time. Upon
termination of the trust term, the remaining trust assets (if any) are distributed
to the remainder beneficiaries of the trust (typically the grantor’s children).
A CLAT can be created for a term of up to 20 years or can be
based on a specific individual’s lifetime. A CLAT requires that an annuity
payment be made to the charitable beneficiary/-ies at least annually,
regardless of the income generated by the CLAT. The individual creating the
CLAT receives a charitable deduction based on the present value of the annuity
payments. The value of the taxable gift made by the individual creating the
CLAT to the remainder beneficiaries is equal to the fair market value of the
assets transferred to the CLAT, less the present value of the annuity payments.
With both a GRAT and a CLAT, the individual creating the
trust wants to create a rate of return on the assets that exceeds the interest
rate set by the Internal Revenue Service. Subject to market
considerations, there is a greater chance that the rate of return on
investments in a low interest rate environment will exceed the interest rate set
by the Internal Revenue Service, which increases the likelihood that there will
be additional assets at the end of the GRAT or CLAT period that will pass to
the remainder beneficiaries of the trust with little or no gift tax.
This is a sponsored legal report from Lane Powell PC. Heidi Orr, a shareholder at Lane Powell PC, focuses her
practice in the area of estate planning, estate and gift tax, probate and trust
administration, and charitable gift planning. She can be reached at
206-223-7742 or email@example.com.