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"What is a Grantor Retained Annuity Trust

(and why is now an exceptional time to create one)?" 


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Estate Planning Update
October 2011

What is a Grantor Retained Annuity Trust (GRAT)?


* A GRAT is a specific kind of irrevocable trust that may be used to mitigate potential estate taxes by removing the future appreciation of certain assets from your taxable estate - an "estate freeze."


* A GRAT is funded with an initial gift by its grantor. The GRAT then pays an annuity to the grantor during the trust's term, which is usually 2 or more years.


* When a GRAT is created, if the amount contributed by the grantor exceeds the cumulative amount of the annuities to be paid during its term increased by a federal discount rate (the "Section 7520 rate"), the difference will be subject to gift tax. However, a GRAT may be structured so that these amounts are equal; and thus, no gift tax will be due - a "zeroed-out GRAT."


* At the end of its term, any assets remaining in the GRAT are distributed to the remainder beneficiaries - often the grantor's children - without any tax consequences to the grantor, nor to the beneficiaries.


* If the grantor does not survive the GRAT's term, the assets remaining in the trust will be subject to estate tax. However, the grantor's estate tax liability will be no greater than if he or she had not created the GRAT in the first place.


Why is now an exceptional time to create a GRAT? 
* Currently, the Section 7520 rate, which is adjusted monthly, is an unprecedented 1.4%. Consequently, if a GRAT is funded with assets that appreciate more than 1.4% (a remarkably low threshold!) during the GRAT's term, all of the excess appreciation will be distributed to the remainder beneficiaries tax-free.
* 2-year zeroed-out GRATs have been very popular. However, Congress has repeatedly threatened to enact legislation that would require a minimum GRAT term of 10 years. Anyone wishing to take advantage of the opportunity to create a shorter term GRAT should act soon.

* A GRAT has the distinct advantage of being specifically authorized in the Internal Revenue Code, unlike certain other riskier estate freezes.

* A grantor who creates a GRAT now is less likely to suffer buyer's remorse if Congress eliminates the estate, gift, and generation skipping transfer taxes in the near future (as some commentators have speculated) than someone who utilizes any of several other estate freezes.

Please contact me at 323.654.9513 or if you would like to discuss your current estate plan.

Brooks Paley, J.D., LL.M.
About Paley Law Corporation
Brooks 0168

Paley Law Corporation is based in Los Angeles and specializes in providing personalized, sophisticated estate planning and related legal services.  Brooks Paley, J.D., LL.M., is the managing principal of Paley Law.  Brooks is quoted in the June/July 2011 issue of Working Ranch Magazine ("Death Tax Tips") on the impact of the estate tax on family-owned businesses and tax planning opportunities available to them.

The above material is provided for general informational purposes only and is not intended to constitute legal advice in any particular matter. Transmission of this material does not create an attorney-client relationship. Paley Law Corporation does not warrant the content of this material and is not responsible for any errors or omissions associated with it.

To ensure compliance with requirements imposed by the Internal Revenue Service, Paley Law Corporation informs you that any U.S. tax advice contained in this communication (including any links to other websites or material) is not intended to be used, and cannot be used, for purposes of (i) avoiding penalties imposed under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.


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2011 Paley Law Corporation