Grat Seminar

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This is a seminar for Financial Advisors and CPAs on the Grantor Retained Annuity Trust, or GRAT

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Grat Seminar

  1. 1. The Grantor Retained Annuity Trust (GRAT) By Ward J. Wilsey, JD, LLM
  2. 2. GRAT <ul><li>Excellent Estate Planning tool </li></ul><ul><li>Minimizes Estate Taxes </li></ul><ul><li>Leverages $1,000,000 Lifetime Gift Tax Exemption </li></ul><ul><li>Can exempt appreciation from Estate Tax </li></ul><ul><li>For clients with net worth above $10 million </li></ul>
  3. 3. Why GRAT <ul><li>Simple </li></ul><ul><li>Safe </li></ul><ul><li>Effective </li></ul><ul><li>Flexible </li></ul>
  4. 4. Simple <ul><li>No income tax consequences </li></ul><ul><li>No additional return, just an additional schedule </li></ul><ul><li>Client may serve as trustee </li></ul><ul><li>Only need to perform actions once per year </li></ul>
  5. 5. Safe <ul><li>Sanctioned by IRS code 2702 </li></ul><ul><li>Follow the rules and no audit risk </li></ul><ul><li>Long list of instructions from case law, regulations and PLRs </li></ul>
  6. 6. Effective <ul><li>All growth above the 7520 rate removed from estate </li></ul><ul><li>If assets do not appreciate, you get them back, without penalty </li></ul><ul><li>No risk </li></ul>
  7. 7. Flexible <ul><li>Can set how beneficiaries will receive inheritance </li></ul><ul><li>Spouse can be beneficiary, and trustee of their own trust </li></ul><ul><li>Any type of asset can go in a GRAT </li></ul><ul><li>Complete autonomy over investments </li></ul>
  8. 8. How it works <ul><li>Client makes gift of assets into GRAT </li></ul><ul><li>Client gets annuity for term of GRAT </li></ul><ul><ul><li>Minimum of 7520 rate </li></ul></ul><ul><li>At the end of the term, it passes to beneficiaries, free of tax </li></ul><ul><li>Gift is the value of the remainder when the GRAT is formed </li></ul>
  9. 9. Traditional GRAT <ul><li>Client puts $1,000,000 of stock into GRAT </li></ul><ul><li>Term is 20 years, at 7520 rate of 6.2% </li></ul><ul><li>Invests for 12% return (client pays income taxes) </li></ul><ul><li>Receives an annuity of $62,000 per year </li></ul><ul><li>Present value of gift is $300,268 (reported on gift tax return) </li></ul>
  10. 10. Traditional GRAT results <ul><li>$5,178,041.66 removed from Estate and passes to beneficiaries </li></ul><ul><ul><li>$2,500,000 or so of estate tax savings </li></ul></ul>
  11. 11. Downsides <ul><li>If you die, value of asset is brought back into estate </li></ul><ul><li>Gift tax implications </li></ul><ul><li>If assets do not appreciate above 7520 rate, there is no benefit </li></ul><ul><li>All these downsides can be overcome with planning </li></ul>
  12. 12. Avoiding Inclusion <ul><li>Problem: You want to avoid having value of annuity included in estate if you die </li></ul><ul><ul><li>Use series of 2 year rolling GRATs, rather than 20 year </li></ul></ul><ul><ul><li>Use crafty drafting to make sure only value of remaining annuity is placed back into your estate </li></ul></ul>
  13. 13. Avoid Gift Tax Implications <ul><li>Problem: Client has used up gift tax exemption, cannot report taxable gift </li></ul><ul><ul><li>Set Annuity so high that remainder is 0 </li></ul></ul>
  14. 14. Zeroed Out GRAT <ul><li>Client puts $1,000,000 of stock into GRAT </li></ul><ul><li>Term is 2 years, at 7520 rate of 6.2% </li></ul><ul><li>Invests for 12% return (client pays income taxes) </li></ul><ul><li>Receives an annuity of $546,956 per year </li></ul><ul><li>Present value of gift is $0.35 (reported on gift tax return) </li></ul>
  15. 15. Result <ul><li>$94,853 still in trust </li></ul><ul><li>All appreciation above the 7520 rate out of estate </li></ul><ul><li>$3,827,218 of tax free wealth passed over 20 years </li></ul>
  16. 16. Zeroed Out GRAT <ul><li>Client puts $1,000,000 of Family LLC Interests into GRAT </li></ul><ul><li>33% Discount </li></ul><ul><li>Term is 2 years, at 7520 rate of 6.2% </li></ul><ul><li>Invests for 12% return (client pays income taxes) </li></ul><ul><li>Receives an annuity of $355,521 (not the $546,956) per year </li></ul><ul><li>Present value of gift is $0.22 (reported on gift tax return) </li></ul>
  17. 17. Result <ul><li>$289,000 still in trust </li></ul><ul><li>All appreciation, and then some, out of estate </li></ul><ul><li>$11,660,967 of tax free wealth passed over 20 years </li></ul>
  18. 18. The Family GRAT <ul><li>Apply the concept of the Family Gifting Trust (SLAT) to the GRAT </li></ul><ul><li>Be very careful of the Reciprocal Trust Doctrine </li></ul><ul><li>Fund in different years </li></ul>

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