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.

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"Congress has been working-not very effectively-on fixing this," said Frederick Caspersen, partner at Farella Braun and Martel, a San Francisco-based law firm with an office in St. Helena.

Mr. Caspersen works in the family wealth group. He said congress will probably extend it for another year to have time to work on it.

He expects the exemption rate to stay the same, at least for the time being, and the tax rate to stay the same as well.

"I don't think we will have a long-term solution until 2011," he said. "Congress doesn't like to make changes before an election."


As of July 1, the Financial Accounting Standards Board codified the Generally Accepted Accounting Principles.


The Alternative Minimum Tax has been patched for a number of years. The American Recovery and Reinvestment Act has included in its proposal making the increased exemption permanent.

The increased exemption is $46,700 for individuals and $70,950 for married couples filing jointly.


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Mark Friedlander, a 49-year industry veteran, retired from the practice of Friedlander Cherwon Capper LLP on Aug. 15.

Mr. Friedlander is a member of the American Institute of Certified Public Accountants, California Society of Public Accountants, Society of California Accountants, San Rafael Chamber of Commerce and California Chamber of Commerce. He has served on the boards of directors of several nonprofit organizations, including as president of one and treasurer of four others. Mr. Friedlander is also a long-standing member of the Marvelous Marin Breakfast Club.

Submit items for this column to Jenna V. Loceff at jloceff@busjrnl.com, 707-521-4259 or fax 707-521-5292.