Limitations on GRATs May Be Close

December 3, 2010

Our update of March 29, 2010, summarized the usefulness of Grantor Retained Annuity Trusts (GRATs) in estate planning, and reported action by the House of Representatives to limit that usefulness by requiring all GRATs to have a minimum term of 10 years. That House action went nowhere in the Senate, but the idea is still around. It’s likely to be seriously considered in the current flurry of “Lame Duck” congressional activity. It will be a part of the package the Senate is expected to vote on tomorrow, and although the Senate is not likely to approve the package, this is just one step in what is likely to become an animated dance over the next couple of weeks.

Today’s lesson, as in our March update, is that if it makes sense to create a GRAT, it shouldn’t be put off. So far, any legislation that restricts GRATs is proposed to take effect when President Obama signs it, but that effective date could be moved earlier as Congress strives to find revenue from any available source.

Meanwhile, for December 2010, the hurdle rate that defines a GRAT’s success is lower than ever – 1.8%. That means that, on average, if the amount of the annual income and growth of the assets transferred into a GRAT this month exceed only 1.8% over the life of the GRAT, that excess will pass to the transferor’s children (or other beneficiaries) free of gift tax – again suggesting that any pending plans to create GRATs shouldn’t be put off.

Fiduciary Advisory Services and Private Wealth Services

McGuireWoods’ Fiduciary Advisory Services and Private Wealth Services Teams stand ready to advise individuals, financial institutions, and other clients about planning, tax, and fiduciary matters. McGuireWoods’ Private Wealth Services Group has been ranked by Chambers, the international rating service for attorneys, as one of the top wealth management legal practices in the country for several years. Please click here for a full listing of our lawyers and their locations.