The White House recently proposed changes to the rules governing Grantor Retained Annuity Trusts. These trusts pay an annuity to the grantor over the life of the trust that equals the initial value of the assets plus an interest rate established by the IRS (currently 2.4 %). The annuity is not taxed since it flows back to the creator of the trust.
If the investment produces a greater return than the IRS established rate, there is a remainder in the trust which can be transferred to the beneficiaries of the trust without any gift tax being assessed.
But if the trust grantor dies during the term of the trust, the assets in the trust revert back to the grantor’s estate and are subject to estate taxes. To minimize the risk of the grantor passing away before the end of the trust term, Grantor Retained Annuity Trusts have been established which have short terms, some as short as two years.
Without the GRAT setup, any gifts by an individual in excess of $1 million over the individual’s lifetime would be subject to the current 45% tax.
The White House has proposed setting a minimum term of 10 years for GRATs. This minimum term might encourage individuals over 75 years of age to reconsider establishing a GRAT.
Contact an estate planning law firm for further information.