Given the decline in market values, we expect that many of the GRATs that were funded last year are “under water”. That is, the assets remaining in the GRAT will not be sufficient to meet the GRAT’s annuity obligations to the grantor, let alone leave any assets in the GRAT for the benefit of the GRAT remainder beneficiaries. However, given depressed asset values and the low current interest rates, it is possible that the GRAT’s assets, going forward, will increase in value at a rate greater than the current "hurdle rate" of 2.4% for March.

There is a way you might take advantage of low interest rates to improve the chances of having a successful GRAT. Assume that you expect the assets in the current GRAT (“GRAT One”) to increase in value in the future at a rate greater than the current “hurdle rate”. If so, you could withdraw the assets from GRAT One (the “Acquired Assets”) and contribute these assets to a new GRAT (“GRAT Two”). So long as you replace the assets withdrawn from GRAT One with assets equal in value to the Acquired Assets (the “Substitute Assets”), this exchange should be ignored for income, gift and estate tax purposes.

Knowing that GRAT One will fail simply will mean that the grantor will reacquire all of the Substitute Assets. If GRAT Two succeeds (after all, it only needs to beat the current “hurdle rate” starting from a low asset value), the excess over the “hurdle rate” will pass to the GRAT Two beneficiaries free of gift and estate tax (assuming the grantor survives the GRAT Two term). In other words, the GRAT “swap” is one way to turn a failing GRAT into a successful one.