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Chris Jones

A key goal of what we refer to as “estate planning” is to preserve a legacy for your family.  How can you get as much of your estate as possible into the hands of your beneficiaries?  That means minimizing, if not eliminating erosion from taxes and court related fees. While there is uncertainty surrounding the future rates of gift and estate taxes, you may be tempted to put your plans on hold. But strategies exist to pass significant assets to your beneficiaries at little or no tax cost to you.


We have discussed many planning tools that leverage the gifting of assets to family members so as to minimize or avoid transfer taxes (gift and estate), such as family limited partnerships and personal residence trusts. Another such strategy is the grantor retained annuity trust. By transferring assets now, future income and appreciation of those assets also escapes transfer taxes.

How It Works

A grantor retained annuity trust (GRAT) is a type of irrevocable trust in which the grantor transfers assets into a trust that the grantor creates. The grantor receives a fixed amount annuity from the trust for a number of years. At the end of the term, any remainder in the trust passes to the grantor’s beneficiaries, such as their children.

The grantor can create a GRAT without paying any gift tax on the remainder passing to the trust beneficiaries if the value of the annuity payments is equal to the value of the property contributed to the trust. The result is commonly known as a “zeroed out” GRAT. The trust assets just needs to appreciate in value greater than the published rate set by the federal taxing authorities for loans interest between family members. If the assets grow enough in value, and the grantor remains alive for the term of the trust, the excess appreciation is transferred without any gift or estate tax! 

Increasing Effectiveness

GRATs work best with a positive volatile market. Unlike normal investing strategies, these trusts pay out more by using concentrated portfolios and a short annuity term of typically two years. A concentrated portfolio puts more volatility to work and increases the likelihood that the trust will have appreciation above the federal rate. Secondly, by structuring a short annuity term, if the assets did not appreciate enough this time, they can be “rolled” into another GRAT, i.e., the grantor sets up a series of overlapping short term trusts, using the annuities received each year to fund the next GRAT. Even if one GRAT fails to exceed the federal rate, leaving no excess for the beneficiaries, each new GRAT is a new opportunity. Even with just a few wins, the amount that goes to the beneficiaries can be impressive. 


Taking a wait and see attitude on asset transfer planning assumes that the rules won’t change in the future. However, the history of federal taxation is one of continual change. Can you afford to wait and see what the next changes are? Planning is about being proactive while you have the opportunity. Waiting inevitably leads to the loss of opportunities. Take care of your concerns now, by taking action today.

- The Estate Planning Law Team
  Rogers Sheffield & Campbell, LLP

This article is not intended to provide legal advice. For legal advice on any of the information in this post, please contact us directly, use the form to the right or contact us by phone at 805-963-9721.

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