Interest rates are currently at an all-time low, making it an imperative time to consider all the potential estate planning options that you may have. Low interest rates provide an advantageous opportunity to utilize grantor-retained annuity trusts, also known as GRATs. GRATs are an instrument used to transfer appreciating assets, or assets that become more valuable over time, such as securities, real estate, or private equity investments. Generally, GRATS should be utilized when interest rates are low because they operate by freezing the value of the property transferred to the trust. As a result, future appreciation of the asset will transfer free of estate tax for the named beneficiaries of the grantor. This type of trust allows you to save a lot of money if the trust is set up properly and is set up at the correct time.
To create a GRAT, a grantor will transfer his or her appreciating property into a trust for a minimum of two years, and the grantor will then have the right to be paid an annuity, or fixed amount of money for a stated period of years. This annuity payment will add up to the original value of the asset at the time it is placed in the trust and will be based on the IRC Section 7520 rate. The IRC Section 7520 rate is published by the IRS every month, and it is how the IRS calculates the current value of a life estate, annuity, or remainder interest. The IRC Section 7520 rate is calculated to be 120 percent of the average interest rate for midterm Treasury obligations. As such, when interest rates are low, the Section 7520 rate is low. As a result, a GRAT is most successful when the appreciation of the property placed in the GRAT is higher than the Section 7520 rate. When this occurs, the investment performance of the property contained in the grantor-retained annuity trust surpasses the Section 7520 rate over the annuity term. If the investment performance does surpass the Section 7530 rate at the time you placed the asset in the GRAT, then at the end of the annuity term, the remainder appreciation and future income on the property placed into the GRAT is distributed to the beneficiaries and removed from the grantor’s taxable estate. This occurrence, in turn, reduces the federal estate tax.
Right now, the interest rates are low and the Section 7520 rate is 2%, making it an opportune moment to consider transferring your appreciating assets into a grantor-retained annuity trust. This trust is a safe and effective way to reduce or eliminate a large estate tax at the time of your death.
If you or someone you know own appreciating assets and are interested in establishing a grantor-retained annuity trust, please do not hesitate to contact the attorneys at Chepenik Trushin LLP. This is a time-sensitive opportunity that may prove extremely beneficial to you and your loved ones. The experienced and knowledgeable attorneys at Chepenik Trushin are always available to assist you with any of your estate planning decisions.