The Obama administration's proposed budget legislation requires that GRATs last for at least 10 years. The proposed budget says that the 10 year requirement applies to GRATs signed after the date of the new law. Therefore, tax planning with shorter GRATs prior to the enactment of the legislation provides a unique opportunity to save tax dollars. Additionally, the interest rate used by the IRS to calculate gifts is now only 2.4% (the lowest was 2.2%). A grantor retained annuity trust ("GRAT"), uses this low rate as the assumption for the growth of stocks or other securities you gift. As a result, asset appreciation beyond this low rate is a tax-free gift to your beneficiary. The GRAT, generally a short-term trust, takes advantage of the rate differential. A GRAT pays an annuity back to you and the remainder (all of the asset appreciation) goes to your donee tax-free.
Now is a great time to take advantage of an opportunity for tax-free gifts to family members or others. The following examples show the "tax-free gifts" that can be made this month using a 5 year GRAT with a nominal 7.5% growth: see table