Authored by: Laura Wartner, Esq.

On June 15, 2010, the House passed a bill that would impose new and restrictive limitations on Grantor Retained Annuity Trusts (“GRATs”) a popular estate planning technique.  A GRAT is an irrevocable trust in which the creator of the trust (the “Grantor”), contributes property to the trust in exchange for the right to receive an annuity payment for the term of the GRAT.

GRATs can be structured so that the value of retained annuity portion is virtually equal to the value of the property contributed, meaning that no gift was made when the GRAT was funded.  In effect, the GRAT shifts to the GRAT beneficiaries the appreciation on the property that occurs during the GRAT term.  One of the downsides to the GRAT, however, is that if the Grantor dies during the GRAT term, all of the GRAT property is included in the Grantor’s estate, and therefore may be subject to estate tax.

If the new bill becomes law, how will it affect GRATs?

1. By requiring a 10 year minimum term.  This will increase the chances that the Grantor will die during the GRAT term.  Because in that event the GRAT assets may be included in the Grantor’s estate, GRATs will not likely be used by older or unhealthy clients.
2. By requiring a remainder interest.  No longer can a GRAT be structured in such a manner that no gift is made.  A gift of some amount will be required, but how big the gift must be has not been stated.

Clients who have been considering creating a GRAT are advised to do it now.  Time is running out.