Subject: Estate Planning - Grantor Retained Annuity Trusts (GRATs)

The recent turmoil in the markets is not necessarily all bad news. Certain estate planning vehicles have become particularly attractive in today's market because they outperform when interest rates are low and allow you to remove undervalued or appreciating assets from your estate. This will occur once the stock market reverses recent trends. One particularly effective vehicle is the Grantor Retained Annuity Trust ("GRAT"). A GRAT is an effective planning strategy for transferring your assets to your children at a substantially discounted gift tax cost. With estate tax rates for New York residents of 55%, the GRAT can be a very important planning tool. A GRAT is an ideal vehicle for transferring equities and other assets out of your estate that currently have appreciation potential in excess of 3.6% per annum. In a GRAT, the grantor (trust creator) contributes assets to the trust and receives a fixed annuity for a specified term of years. The assets remaining in the GRAT at the end of the term will pass estate and gift tax-free to the trust beneficiaries.

Example:

The following chart is an illustration of the benefits of a GRAT with a 5-year term. The calculation assumes 10%, 15% and 20% annual rates of return. The calculation assumes an initial contribution to the GRAT of $1 million in equities or other appreciating assets. Note that other assets such as stock in a closely held business could have excellent results.

This chart reflects how much property would be removed from your estate on a $1 million transfer after only five years. The amount removed from the estate will continue to grow after the 5-year term as the trust assets continue to appreciate in value. As an example, if $500,000 was removed after five years and it continues to appreciate at 10%, in 30 years the amount removed from the estate will be nearly $9 million (assuming the grantor pays all income taxes). Enhanced planning can result if multiple GRATs are created with different types of assets (for example, a separate GRAT for a long-term cap fund, short term value fund, international fund, hedge fund, etc.). Also, the term of the GRAT can be as low as 2 years.

In addition, because a GRAT is treated as a grantor trust for income tax purposes, the grantor will pay all the tax on the income generated by the trust assets, meaning that the trust principal in the trust will continue to grow outside of the grantor's estate without any reduction for income tax payments. Over time, this will result in very significant estate tax savings.

Please contact us to discuss whether creating a GRAT is appropriate for you.

Circular 230 Disclosure: Internal Revenue Service regulations provide that, for the purpose of avoiding certain penalties under the Internal Revenue Code, taxpayers may rely only on opinions of counsel that meet specific requirements set forth in the regulations, including a requirement that such opinions contain extensive factual and legal discussion and analysis. Any tax advice that may be contained herein does not constitute an opinion that meets the requirements of the regulations. Any such tax advice therefore cannot be used, and was not intended or written to be used, for the purpose of avoiding federal tax penalties that the Internal Revenue Service may attempt to impose.