In Defense of Sales to Defective Grantor Trusts

• Publication year: 2011
• Pages: 28
• Citation: Vol. 24 No. 1 Pg. 28

Utah Bar Journal Volume 24.

Vol. 24, No. 1, 28. In Defense of Sales to Defective Grantor Trusts

Utah Bar Journal
Volume 24 No. 1
Jan/Feb 2011

In Defense of Sales to Defective Grantor Trusts

by Jeffrey D. Steed

In what has become a near-landmark publication, Julie K. Kwon and Daniel J. Loewy, two senior analysts from Bernstein Global Wealth Management, published their article, GRATs: On a Roll, in the June 2005 issue of Trust and Estates Magazine. See Julie K Kwon and Daniel J. Loewy, GRATS: On a Roll, Trusts and Estates, June 2005, at 33. In their article, Kwon and Loewy analyze the "probabilities of success" when comparing a rolling grantor-retained annuity trust ("GRAT") to other investment-driven gifting strategies for large estates, including a sale to a defective grantor trust ("DGT"). See id. Using a highly advanced wealth forecasting analysis model that simulated over 10,000 capital market scenarios across a wide spectrum of asset classes, Kwon and Loewy determined that, in almost all cases, a rolling GRAT strategy statistically outperforms other popular strategies for increasing the likelihood of successful wealth transfer. See id. According to Kwon and Loewy, the success of rolling GRATs is largely due to the ability to significantly decrease the inherent market risk associated with investment-driven estate planning strategies while, at the same time, capturing the upside of market volatility. See id. In other words, the ability to lock in wealth transfer gains from previous years in a rolling GRAT strategy has a greater probability to outweigh any advantage from lower interest-rate benefits and the avoidance of all mortality risk generally provided by a sale to a DGT.

In recent years, Kwon and Loewy's analysis has fueled somewhat of a trend in the estate planning and wealth management community to promote the superiority of GRAT strategies over sales to DGTs and other investment-driven estate planning tools. Notwithstanding the amazing benefits that rolling GRATs afford clients to effectively minimize potential estate tax liability and to lock in the upside of market volatility, the advantages of a rolling GRAT over a sale to a DGT should not be overstated. It is important to recognize various, overlooked advantages involving sales to DGTs which, when taken as a whole, may favor using a sale to a DGT over a rolling GRAT depending on a client's unique estate planning objectives.

There is no dispute that...