Wednesday, August 18, 2010

Do Expected Changes to GRAT Legislation Affect YOUR Plans?

If you (or your financial planner) have been considering creating a Grantor Retained Annuity Trust (GRAT) to avoid gift taxes on financial gifts to family members you may want to read this article from Forbes before you take the final step.  According to author Seth R. Kaplan there has been much talk in Washington of late about what he calls “anti-GRAT legislation”, and although the offending bills have not passed in the Senate thus far, it seems as though it’s only a matter of time before the rules and regulations regarding GRATs change—and not necessarily for the better.

According to Kaplan, “a bill co-sponsored by 10 senators (relating to an extension of COBRA premium assistance) was introduced at the end of June containing provisions targeting GRATs, the most significant of which requires GRATs to have a minimum term of 10 years. So it appears that some form of this anti-GRAT legislation will eventually become law.”

This ten year minimum will put a stop to the short-term GRATs (2-4 years) which have been especially popular among elderly individuals (a popularity that is understandable considering that if the grantor dies before the expiration of the trust the assets will revert back to the grantor’s estate and are subject to estate taxes.) But Kaplan claims that long-term GRATs can still be “a powerful tool for effective wealth transfer planning, especially where interest rates are low and asset values are depressed but expected to rise.”

If you’ve been considering creating a GRAT, and know that you want the short-term GRAT, you’ll probably want to talk to your estate planner or financial advisor ASAP, before the restrictive legislation Kaplan is expecting comes to pass.  However, the proposed legislation doesn’t have to be a loss.  If you have the time, you may want to consider the benefits of the long-term GRAT.