Increase would raise risk of using 'rolling GRAT' for market gains
Congress is trying to change the minimum period for a zero-tax Grantor Retained Annuity Trust, commonly referred to as a GRAT, to 10 years instead of the current two.
A GRAT allows large financial gifts to be made to family members without paying a gift tax.
According to Steven Goldberg, an estate and tax planning attorney and partner at Friedemann Goldberg LLP in Santa Rosa, the typical donor would put a large stock account into the GRAT and have it set up for a two-year period. During that term, the GRAT makes two annual payments, each equal to about 52 percent of the GRAT's initial value. Any stock return greater than the interest rate that applies to GRATs, which was 2.4 percent in January 2009 as determined by the IRS, goes to the beneficiaries. Both the percentages fluctuate based on current interest rates.
So if $1 million is put into a GRAT in January, and it earns 7 percent in the first year, the first year's payment to the donor is $518,000, which leaves $552,000 in the GRAT. If the GRAT also earns 7 percent in the second year, the GRAT will have $590,500 when the second year ends. The result is that $72,500 will go to the children or other beneficiaries.
Of course, if the market staged a rally sometime in the first or second year, the amount going to beneficiaries would be much greater. If the GRAT earned a 30 percent return in the second year, the GRAT would have $717,000 prior to the second payment and $199,400 would be left over for the children. If the 30 percent return occurred in the first year, approximately $318,600 would be left over.
The grantor could achieve a similar result even if the return happened in the second year by putting the $520,000 from the first year into a new GRAT.
This technique is referred to as a "rolling GRAT" and makes it so the donor can catch the market rally whenever it occurs. If the market does not go up at all during the two-year period, all of the GRAT would be paid back to the donor. By using the rolling GRAT technique, the donor knows that whenever the market does go back up, they will be able to take advantage of the increase.
By raising the minimum to 10 years instead of two, it would be more difficult for people to take advantage of a rolling GRAT.
Mr. Goldberg said a person could still have a rolling GRAT with a 10 year minimum, but there may be an opportunity cost.
"You take the risk that you have to survive the 10 years," he said.
For a number of years, estate planners and accountants have discussed 2010 in terms of "What will happen with the estate tax?"
As of now, there will be no estate tax next year. For 2009, the exemption is $3.5 million at a 45 percent tax rate.
[caption id="attachment_14791" align="alignright" width="108" caption="Frederick Caspersen"][/caption]