Valuable planning opportunity available using GRATs or GRUTs.

• Author: Perez, Robert L.
• Position: Grantor retained annuity trusts, grantor retained unitrusts

The Chapter 14 valuation rules, although generally less onerous than the Sec. 2036(c) anti-estate freeze rules they replaced, have narrowed the transfer tax planning opportunities available for intrafamily transfers in trust in which the transferor retains an interest. Nevertheless, several valuable planning opportunities remain - among them, the use of grantor retained annuity trusts (GRATs) and grantor retained unitrusts (GRUTs). GRATs and GRUTs are not only favored over other trusts for gift tax purposes, but may also result in overall transfer taxes that are significantly lower than if no trust had been created. Clients who are searching for ways to transfer assets to younger generation family members at a reduced transfer tax cost should consider this exciting new planning technique.

Gift tax consequences

of GRATs and GRUTs

Sec. 2702 - zero-value rule: For purposes of the Chapter 14 valuation rules, which generally apply to transfers between certain family members, the value of a remainder interest in a trust is determined by subtracting the value of the retained interest from the value of the entire property transferred; thus, the higher the value of the retained interest, the lower the value of the remainder. However, under Sec. 2702(a)(2)(A), in determining whether a transfer of an interest in a trust to a family member constitutes a gift (and if so, the amount of the gift), the value of the interest retained by the transferor generally is zero, unless the retained interest is a "qualified interest." In other words, the transferor is treated as having made a gift of the entire value of the property transferred to the trust, regardless of the value of the retained interest.

GRATS and GRUTS under Sec. 2702: The zero-value rule does not apply if the retained interest is a qualified interest. A qualified interest generally is an interest in a GRAT or a GRUT or any noncontingent remainder interest if all the other interests in the trust are GRATs or GRUTs. A GRAT is an irrevocable trust in which the transferor retains the right to receive a fixed amount payable not less frequently than annually - essentially, a fixed annuity. A GRUT is an irrevocable trust in which the transferor retains the right to receive amounts that are payable not less frequently than annually, and that are a fixed percentage of the fair market value of the property in the trust, determined annually.

The value of a retained interest in a GRAT or a GRUT is determined from valuation tables issued by the IRS under Sec. 7520, using an interest rate equal to 120% of the Federal midterm rate for the month in which the valuation date falls. Thus, the value of a gift in trust in the case of a GRAT or a GRUT is the value of the entire property transferred to the trust, less the value of the retained interest determined...