Protecting Your Wealth For Your Family - GRAT

I read a great article on Forbes.com, Keeping Family Wealth From the Taxman, by Elda Di Re and Scott Ferritti. I share a part of that article pertaining to a great taxing saving vehicle for this economy, the GRAT. If you get the chance you may want to read the entire article.

"In view of historically low interest rates, the current environment is an optimal time to give consideration to establishing a Grantor Retained Annuity Trust, "GRAT". A GRAT is a particularly attractive estate planning strategy due to the fact that the resulting gift tax cost can be eliminated.

The GRAT is an estate-freezing strategy that enables the business owner to transfer future appreciation in the business to children at a substantially reduced gift tax cost. Under the GRAT arrangement, the owner would transfer assets to an irrevocable trust and retain the right to receive a fixed annuity for a term of years. At the end of that term, the remaining assets in the GRAT would pass to the children.

The benefit of a GRAT is that, although all remaining assets would go to the owner’s children at the end of the term, the gift tax on the transfer to the GRAT is computed on the value of the remainder interest at the time of the transfer. The value of the remainder interest is computed by taking the original value of the transferred property and subtracting the present value of the annuity payments.

The owner receives annuity payments from the GRAT each year and may be established high enough so that the annuity's value approximates the value of the assets transferred into the trust, thereby reducing the gift tax cost to zero. The ability to "zero-out" the GRAT makes the GRAT an ideal estate planning tool."

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Rethinking Your Estate Plan - Question 3

The article from Money Magazine shared 5 questions to ask when rethinking your estate. Today I share the 3rd question presented in the article.

QUESTION 3: ARE YOUR ESTATE NEEDS SIMPLE OR COMPLICATED?

"Most people need only a simple will or living trust (which helps you avoid the cost of probate). But if you want to put conditions on your bequests, you definitely need a trust. Take the example of a woman who had kids, divorced, and remarried. Through a qualified terminable interest property trust, she can make sure her spouse has enough income if she dies first but preserve the bulk of her assets for her kids." If your estate is large enough that you face taxes (either federal or state), you may need to consider one of these popular options:
"A bypass trust, also known as a credit shelter trust. It lets a couple essentially double their estate-tax exemption. Let's say you're the husband and you die first. Your assets fund an irrevocable trust for the kids, up to the estate-tax exemption level (we'll assume it's the current $3.5 million). Any remaining assets go to your widow in a separate trust. To make sure she won't run out of money, set up the trust so she can receive income from the kids' trust and tap the principal for needs such as medical costs.
The big payout: When she dies, she can pass on $3.5 million in assets tax-free, on top of the $3.5 million you passed to the kids in the bypass trust. And this arrangement ensures that your kids - rather than some guy your widow winds up marrying later - get the money.
A grantor-retained annuity trust (grat). It works like an annuity: You put money in and receive an annual payout based on the IRS-assumed interest rate at the time you set up the trust (it's currently 2.4%). At maturity any appreciation above that goes to designated beneficiaries, such as your children, tax-free.
Now that both interest rates and asset values are low, guess what? There's a good chance that the contents of the trust will grow more quickly than 2.4%, with plenty of money left over."

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