Taking Advantage of the GRAT

October is almost here and NOW is the time to take advantage of a tax saving estate planning

strategy known as a GRAT!

GRATs (grantor retained annuity trust) are vehicles used by estate planners

when clients want to give a financial gift to children or grandchildren free of gift and estate taxes. Per today’s laws, the IRS allows a person to give up to $13,000 a year without worrying about a gift tax.

The IRS frowns on GRATs and recent legislative language in various bills in front of Congress forecasts that the strategy will soon not be as appealing. Today, a GRAT allows a client to contribute an asset into a trust for an established number of years. The appreciation over the hurdle rate (otherwise known as interest) can pass or be transferred to the child’s trust, estate and gift tax free. Currently the rate you have to beat - 2% - (October 1, 2010) is at an all time low, down considerably from the 3.4% rate earlier this year.

Couple this strategy with the current gift tax rate of 35% (could reset next year if the Bush tax cuts expire to a rate of 55% top rate with a $1million exemption) and this is a very attractive time to help your loved ones. The low interest rates also allow families to make loans to help children purchase a home or get a new business going.

If Congress has its way, as they are desperate for revenue, the new laws will make GRATs riskier and more expensive as they will impose a minimum of 10 years, and a gift tax of perhaps 10% to be paid at the time the GRAT is established. Be aware that should you die during a term of a GRAT, the principal and earnings are considered part of your estate which negates the strategy. That being said, a GRAT is not for wealthy folks who are ill or who could possibly pass during the time period.

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