Increasing-annuity payments make GRAT more attractive.

• Author: Taylor, Rick J.
• Position: Grantor retained annuity trust

An increasing-annuity grantor retained annuity trust (GRAT) can be used to increase the amount of property that passes to the remainder beneficiaries without generating a larger taxable gift. The goal of this arrangement is to leave in the GRAT as much appreciating and income-producing assets as possible for the greatest length of time, to increase the amount of property that will ultimately pass to the remainder beneficiaries.

Concept

An increasing-annuity GRAT is structured as a term-certain GRAT with annuity payments that increase each year by a predetermined percentage (limited to 20% under Regs. Sec. 25.27023(b)(1)(ii)(A)). The lower initial payments leave more principal in the trust for a longer period of time, allowing the principal to appreciate or generate additional earnings. As a result, additional property will pass tax free to the remainder beneficiaries at the end of the GRAT term.

Illustration

The following example illustrates the transfer tax savings that can be generated through the use of an increasing-annuity GRAT.

Example: Father, age 50, transfers $1,000,000 of closely held corporate stock to a GRAT, retaining the right to receive an annual annuity of 7.0% ($70,000), which increases by 20% each year for five years, remainder to the grantor's children. Based on an 8.8% Sec. 7520 rate, the value of the remainder interest gift equals $611,864.

During the term of the GRAT, the corporation pays no dividends, but the value of the stock increases by 20% each year. To satisfy the annual annuity payment, the trust makes in-kind distributions of corporate stock. At the end of the GRAT term, $1,762,560 of stock will be transferred to the remainder beneficiaries, determined as follows:

Beginning balance $1,000,000 Year 1 appreciation 200,000 Year 1 annuity (70,000) Year 2 appreciation 226,000 Year 2 annuity (84,000) Year 3 appreciation 254,400 Year 3 annuity (100,800) Year 4 appreciation 285,120 Year 4 annuity (120,960) Year 5 appreciation 317,952 Year 5 annuity (145,152)

Value of property passing

to children under

increasing-annuity

GRAT arrangement 1,762,560

Value of property passing

to children under a 12.5%

level-annuity GRAT

arrangement...