Grantor Retained Annuity Trusts
It could seem as though there should be no problem transferring assets to others without incurring any undue expenses. Unfortunately, the IRS code does in fact stand in the way of cost-free asset transfers in many cases and this is largely due to the existence of the gift tax.
The gift tax is in place to dissuade people from giving gifts while they are still alive in an effort to mitigate their estate tax exposure. The estate tax and the gift tax are said to be "unified," and there is a $5 million lifetime unified gift/estate tax exemption.
So you can give gifts equaling as much as $5 million throughout your life using this exemption without being exposed to the gift tax. But if you were to give $5 million in tax-free gifts utilizing this exemption, the entirety of your estate would be subject to the estate tax.
This is where planning strategies enter the picture. One of these strategies that can often provide tax-free asset transfers is called the "zeroed out" GRAT.
A GRAT is a grantor retained annuity trust. The way that this strategy is employed is you fund the trust with assets that you expect to appreciate considerably and name a beneficiary. You receive annuity payments throughout the trust term, and with this strategy you zero it out meaning you arrange for the annuity payments to equal the entirety of the trust over its term.
The act of funding the trust is a taxable gift in the eyes of the IRS. They account for the anticipated interest using 120% of the federal midterm rate that is in place when you create the trust.
The strategy is executed successfully when the assets actually appreciate beyond this projected amount. Should this take place, your beneficiary will inherit that remainder free of taxation.
ABOUT THE AUTHOR: Kevin Pillion
Experienced estate planning attorneys Sarasota FL of the Co-Executor PLLC offers estate planning and business planning resources to residents of Sarasota FL.
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.