On June 15, 2010, the House passed H.R. 5486, the Small Business Jobs Tax Relief Act. That bill will eliminate Grantor Retained Annuity Trusts (“GRATs”) as we know them by imposing new and restrictive limitations on GRATs. For a description of GRATs and how they are used, click here. The proposed limitations include:
- A minimum required term of 10 years.
- Annuity payments that cannot decrease during the first 10 years of the term.
- The GRAT remainder interest must have a value greater than zero.
The bill would apply to GRATs funded after the date the bill becomes law. Although the law has not changed yet, those familiar with the situation predict the bill will pass soon. How will the new bill affect the way GRATs are used in estate planning?
- The 10 year minimum term will increase the likelihood that the client will die during the GRAT term, in which event the trust assets may be subject to federal estate tax. This will, in effect, reduce the use of GRATs by older and unhealthy clients. This will also limit the ability of even young and healthy clients to capitalize on GRAT volatility, thus reducing GRATs’ appeal.
- Prohibiting declining GRAT payments will prevent the ability to circumvent the 10 year minimum term by front-loading the GRAT payments.
- At this time, it is possible to structure a GRAT with a zero value, so that there would be no gift tax consequences to a GRAT. The requirement of a remainder interest greater than zero means that a gift of some amount will be required, although at this time we don’t know how much greater than zero the remainder interest must be.
If you have been considering a GRAT, you would be well advised to implement it now. Time is running out.
For more information, contact your SGR Estate Planning and Wealth Protection counsel.