The interest rates that are prevalent when financial advisers
establish a GRAT for a client have a great effect on how much
money can be transferred tax- free to the client's children.
The grantor retained annuity trust is a very popular vehicle used
in estate planning/wealth transfer.
In a GRAT, the grantor (Dad) places assets into a trust. Dad
receives an annuity from the trust that pays him back his
principal plus interest through annuity payments.
If there is a remaining balance in the trust after paying Dad his
annuity, it transfers free of gift and estate taxes to the kids.
If there isn't enough in the trust at the end to fulfill the
obligation to Dad, it is a “failed GRAT” and no wealth transfer
There are no penalties for having a “failed GRAT.” All that is
lost is the initial set-up cost.
When a GRAT is established, the government looks to interest rates
to determine the rate Dad should receive through his annuity
payments. This rate is set at the inception and applies for the
life of the GRAT.
This Section 7520 rate is announced monthly. It is at just 1.4%.
As you might imagine, giving Dad less return would leave the kids
with more money in the GRAT at the end. The accompanying chart
illustrates just how dramatic a difference there is in how much is
left to the kids under different rate assumptions.
A GRAT funded with $1 million that produced a 10% annual return
would leave the kids $900,000 tax free with today's 1.4% rate
after 10 years. If the same GRAT was started in 2007 when rates
were about 6%, the GRAT would move only $400,000 — less than half
Here are some tips for setting up a GRAT:
Use multiple GRATs. Don't put all the assets into one GRAT basket.
Put different asset classes into different GRATs. This way, there
will probably be some failed GRATs and some successful ones.
Assets that go in different directions might be best.
Don't procrastinate. President Barack Obama and Congress have
proposals to limit GRATs' attractiveness. A GRAT created before
legislative changes would be grandfathered.
Between the current low rates and tax reform fever in Washington,
we think that anyone contemplating a GRAT should act now.
It is a shame that we are surprised when the government addresses
issues in a timely and expeditious manner. It is even more
surprising when it takes more than one branch of government to get
the job done.
As I wrote in my August 2012 column, floating net asset values for
money market mutual funds would cause lots of tax headaches unless
something was done. Well, the Securities and Exchange Commission
met with the Internal Revenue Service, and lo and behold, we have
Notice 2013-48, which fixes the thorniest issue: application of
wash sale rules.
If the wash sale rules applied to money fund purchases and sales,
there would be inconsistencies because losses would be deferred
but gains would be taxable.
Notice 2013-48 proposes that the wash sale rules won't apply if a
loss is 0.5% or less. The notice doesn't, however, address the
nightmare of having to account for every purchase and sale at tax
Robert N. Gordon (firstname.lastname@example.org) is chief executive of
Twenty-First Securities Corp. and an adjunct professor at New York
University's Leonard N. Stern School of Business.