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InKnowVision HNW Technical Webinar - Grantor Retained Annuity Trust (GRATs)

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GRATs can be a stellar planning tool for the right client with the right kind of assets. Learn how to identify the high value application of this tool and how to maximize the advantages while …

GRATs can be a stellar planning tool for the right client with the right kind of assets. Learn how to identify the high value application of this tool and how to maximize the advantages while minimizing complexity.

What is a Grantor Retained Annuity Trust ( GRAT)?
A Grantor Retained Annuity Trust, commonly referred to as a GRAT, is a powerful estate planning tool used to transfer valuable assets to family members at potentially reduced values.

The grantor, the person creating a trust, transfers property into the ownership of a trust which is then managed by a trustee for the benefit of the named beneficiaries. With a GRAT, the grantor transfers property and reserves an annual annuity from the trust, such as 5%, for a fixed timeframe. The percentage that is paid out is based on the value of the property held in the trust on the date the trust was created.

Learn more about GRATs from Scott Hamilton CEO at InKnowVIsion. www.inknowvision.com

Learn more at www.inknowvision.com

Published in Economy & Finance , Business
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  • 1. InKnowVision’s Monthly HNW Webinar Series Technical Webinar ©2012. InKnowVision LLC. All rights reserved. www.inknowvision.com
  • 2. InKnowVision WebinarsNext Webcasts Marketing- October 26 at 11 am Central Nov 2 at 11 am Central - Case Study Webcast
  • 3. Grantor Retained Annuity Trust SCOTT HAMILTON, CEO INKNOWVISION, LLC 630-596-5090 WWW.INKNOWVISION.COM©2011, InKnowVision, LLC Call us 630-596-5090
  • 4. Why Use a GRAT Years Benefit to Heirs 1-5 $0 6 $6.7M 10 9.8M 20 25.4M 30 65.9M Principal $20,000,000 7520 Rate 1.4% Gift $0 Total Return 10% Term 5 Years Payout 20.84%©2011, InKnowVision, LLC Call us 630-596-5090
  • 5. GRAT Overview Lifetime transfer of cash or property in trust in exchange for an annuity Property GRAT Annuity Payments©2011, InKnowVision, LLC Call us 630-596-5090
  • 6. Term of Years Annuity is generally payable for a fixed term of years Property GRAT Annuity Payments For 10 Years©2011, InKnowVision, LLC Call us 630-596-5090
  • 7. Remainder to Beneficiaries Property remaining in trust after expiration of annuity term passes to beneficiaries at no additional gift tax cost GRAT After 10 Years Beneficiaries©2011, InKnowVision, LLC Call us 630-596-5090
  • 8. Effect of GRAT Term Term Payment 20 57,673 10 107,860 5 208,476 2 510,516 Principal $1,000,000 7520 Rate 1.4% Gift $ 0©2011, InKnowVision, LLC Call us 630-596-5090
  • 9. Effect of GRAT Payment Term Gift 20 (11 years also $0 Gift) 0 10 72,880 5 520,330 2 804,120 Principal $1,000,000 7520 Rate 1.4% Payment $ 100,000©2011, InKnowVision, LLC Call us 630-596-5090
  • 10. Factors in Picking Term Cash flow need Exemption remaining Mortality Time until GRAT property increases©2011, InKnowVision, LLC Call us 630-596-5090
  • 11. GRAT Advantages Effective estate freeze is achievable with minimal or no gift tax cost Over the GRAT term, grantor receives  Value of property transferred in form of annuity, plus  Trust earnings equal to the IRC Section 7520 rate, plus  Other retained interests (e.g., tax reimbursement) As a creation of the Code and Regs a GRAT offers predictable results In worst-case, family generally no worse off©2011, InKnowVision, LLC Call us 630-596-5090
  • 12. GRAT Requirements Transfer is irrevocable Annuity payable to grantor at least annually Payments must be in cash and/or property only Payments may increase at a maximum rate of 20% per-year No further transfers to the trust are permissible during GRAT term©2011, InKnowVision, LLC Call us 630-596-5090
  • 13. GRAT Tax Treatment Taxable gift = property transferred less retained interest Walton case supports zeroed-out gifts Valuation discounts may also apply Gift of future interest so no annual exclusion offset Value of retained annuity interest is based on 7520 rate for month of transfer Grantor’s death during GRAT term results in inclusion of trust property in gross estate Grantor trust for income tax purposes©2011, InKnowVision, LLC Call us 630-596-5090
  • 14. GRAT Suitability Appreciating estate with significant tax exposure Grantor is motivated to make lifetime transfers and can afford to Trust property is expected to outperform 7520 rate during GRAT term Grantor is expected to survive GRAT term Both spouses can fund GRATs to hedge risk Can use life insurance to hedge risk When you cannot do a sale (e.g. buy sell restrictions)©2011, InKnowVision, LLC Call us 630-596-5090
  • 15. GRAT Enhancers Rapid appreciation during GRAT term Property temporarily depressed prior to funding Post-transfer IPO Trust property is big cash-flow generator Cash flow alone may satisfy the annuity Gift tax valuation discounts increase leverage by reducing required annuity payments Cascading or sequential GRATs (admin issues)©2011, InKnowVision, LLC Call us 630-596-5090
  • 16. GRAT Drawbacks Legal, administrative and appraisal fees Special trust provisions for S corp stock to ensure wholly-owned grantor trust status Mortality risk Trust must outperform the 7520 rate during GRAT term or $0 will remain for heirs’ benefit Carryover basis for trust beneficiaries Inefficient for generation-skipping transfers©2011, InKnowVision, LLC Call us 630-596-5090
  • 17. Split Dollar and GRATs Large Policies – Large Premiums No cash flow for loan interest Gift costs lower than interest costs Simple/focused approach Keep assets-still accomplish wealth transfer Make a big charitable gift-pre-fund wealth transfer©2011, InKnowVision, LLC Call us 630-596-5090
  • 18. Big Picture GRAT ILIT©2011, InKnowVision, LLC Call us 630-596-5090
  • 19. Clients Pay Premiums GRAT ILIT©2011, InKnowVision, LLC Call us 630-596-5090
  • 20. Get Back CSV/Premiums Paid in Future GRAT ILIT©2011, InKnowVision, LLC Call us 630-596-5090
  • 21. Give Property to GRAT GRAT ILIT©2011, InKnowVision, LLC Call us 630-596-5090
  • 22. GRAT Makes Payments GRAT ILIT©2011, InKnowVision, LLC Call us 630-596-5090
  • 23. GRAT Remainder to ILIT GRAT ILIT©2011, InKnowVision, LLC Call us 630-596-5090
  • 24. ILIT Pays Off Split Dollar GRAT ILIT©2011, InKnowVision, LLC Call us 630-596-5090
  • 25. Grantor Retained Annuity Trust QUESTIONS 630-596-5090 WWW.INKNOWVISION.COM©2011, InKnowVision, LLC