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GRATS: Great Estate Planning Tools!

A GRAT (grantor-retained annuity trust) is an irrevocable trust into which you can place cash, stocks, mutual funds, real estate, or other income-producing property. You are called the grantor (creator) of the trust. As its name implies, in a GRAT, you, the grantor, retain the right to an annuity for a fixed period of years from assets you've placed into a trust.

At the end of the period of time you specify when you set up the trust (which can be practically any amount of time from, say, 2 to 20 years), the asset you've placed into the GRAT will pass to the beneficiary you named - typically a child, grandchild, or other family member or friend.

WHO SHOULD CONSIDER A GRAT: You should consider a GRAT if you have the appropriate type of asset, are highly likely to outlive the specified term of the trust, and you:

  • have an estate over $2,000,000 (and it's growing)
  • are financially able and psychologically willing to part currently with principal and eventually with the cash flow it produces,
  • are willing to make lifetime gifts to relatives and/or others,
  • are willing to use some or all of your unified credit to offset any outright gift tax in order to achieve significant estate tax savings,
  • can act while the federal discount rate (planners call this the Section 7520 rate) is relatively low (which it is currently) and before the assets you own reach their appreciation potential (and since many assets are currently undervalued in today's market, this is an excellent time for many to consider a GRAT.)
  • are a surviving spouse or divorced individual looking for a marital deduction substitute.

KEY POTENTIAL ADVANTAGES: Saving estate and gift taxes are the two major objectives. In a nutshell, the GRAT allows you to transfer large amounts of wealth at a significant gift tax discount. If you survive the term of the GRAT - even by only one day - the value of the property in the trust at that time is removed from your estate and your family may save thousands - even millions - of dollars of federal and state death taxes.

ADDITIONAL POTENTIAL BENEFITS: There are also many non-tax benefits to GRATs. A GRAT can help you ensure succession. For example, if you want specific assets, such as stock in a closely held corporation, other business interest, land, or family compound to go to one child rather than another, or you do not want a former spouse, creditor, or someone who contests your will to be able to obtain that asset, the GRAT will help provide assurance against such a contingency. In most states, because a GRAT is an irrevocable trust, it's much less likely that the property will be lost if your estate is embroiled in a will contest, election against the will, or a creditor-imposed lawsuit.

GRATs can help you unify assets. If you own income-producing property in more than one state and would like to unify the administration of those assets and save on probate costs, the GRAT can help avoid ancillary administration (probate of out-of-state property) and its consequent costs, delays, and aggravations.

GRATs are age neutral. There is practically no cut-off age after which a GRAT will no longer be mathematically feasible. These are "little to lose, lots to gain" tools that even people in their 80's may want to use.

ARE GRATs THE PERFECT ESTATE PLANNING TOOL? Of course not. Every state or financial planning tool or technique has costs and downsides and no concept works equally well for everyone. The trick is to find the combination of tools or techniques that will most cost-efficiently help you achieve your own personal objectives.

Please feel free to call or email to further discuss GRATs or other matters of financial concern.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.

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