Grantor retained annuity trusts (“GRATs”) can be a very effective way of transferring high-return or rapidly appreciating assets to children and other beneficiaries with minimal estate and gift tax consequences.

GRATs can be especially well-suited for family business interests. The success of a GRAT depends on whether its assets outperform a certain rate (known as the “7520 rate”) set by the IRS.

  • The 7520 rate is 1.4% for GRATs funded in October. This is the lowest 7520 rate ever, meaning that the “hurdle” the GRAT must outperform is extremely low.
  • To take advantage of this rate, the GRAT needs to be created and the assets transferred into the GRAT by October 31, 2011.
  • Because the grantor of a GRAT must survive the term of the GRAT for the GRAT to succeed, it is common to use two-year or other relatively short-term GRATs.
  • The opportunity for short-term GRATs may not last. With the ongoing budget and debt talks in Congress and the creation of the new “supercommittee,” there is some concern that new legislation could be proposed as soon as this fall that would limit the availability of GRATs by requiring that the term of a GRAT be at least 10 years. This new legislation may become effective as of the date it was introduced in Congress, which means that the window for two-year GRATs could be closed this year.

Changes in Federal Estate Tax Laws and Maintaining Flexibility in Planning

On January 1, 2013, the federal estate tax exemption – currently $5 million per person – will drop to $1 million unless a new law is passed. In addition, the rate would jump dramatically, from the current rate of 35% to a rate of 55%.

Anything can and might happen with the estate tax before 2013. The instability of the tax highlights the need to have a flexible estate plan in place.

As is always true, minimizing taxes should not be the sole reason to keep estate planning current. Other important reasons for making an estate plan remain:

  • naming guardians and providing management of assets for children and young adults;
  • providing asset protection for family members;
  • planning for the succession of a family business; and
  • planning for the smooth handling of the transfer of property to spouse, children, stepchildren or others in second marriages.

For Individuals Who Are Ohio Residents or Have Certain Types of Property in Ohio:  Ohio Estate Tax Repealed Starting in 2013

This summer, the Ohio General Assembly repealed the Ohio Estate Tax starting January 1, 2013. The Ohio estate tax will remain in effect through 2012, with the highest rate (7%) on estates over $500,000.