In a May 24, 2009 story in Investment News, Venable attorney Jennifer Pratt was quoted on the use of grant-or retained annuity trusts (GRATs) in estate planning. A GRAT is an irrevocable trust that potentially allows the grantor to pass on much of the appreciation of an asset to heirs, free of gift tax.
According to the article, wealth managers and tax attorneys are advising wealthy clients who may need to minimize gift and estate tax payments to consider taking advantage of the popular tax-planning tool while they still can. This increased attention to GRATs is the result of an Obama administration proposal to curtail their tax benefits, which is included as part of the White House's revenue plan for 2010.
The article notes that if the trust grantor dies during the term of the GRAT, the asset will be included in the grantor's gross estate and be subject to estate tax, which could be as high as 45%. Consequently, there has been a proliferation of GRATs that last only two years, reducing the risk of the grantor's death during the term of the trust. As a result, the White House has proposed requiring that a GRAT have a minimum 10-year term.
New legislation may also result in more sales of the remainder interest of a GRAT, said Jennifer Pratt, an attorney in Venable's tax and wealth-planning practice.
The remainder is the amount left after the retained annuity and is typically gifted to the remainder beneficiaries, she said. "Our solution to avoid the mortality risk, which is much greater with a 10-year mandatory term, is to sell the remainder interest of the GRAT for fair market value," Ms. Pratt said.