Insights

Rolling Grantor Retained Annuity Trusts (GRATs): Perpetual Estate Tax Savings

05.03.24

As part of your estate planning strategy, you may be looking for ways to minimize your estate tax liability and transfer wealth to your beneficiaries. One strategy that has gained popularity in recent years is the use of Grantor Retained Annuity Trusts (GRATs). However, you can take this strategy a step further with Rolling GRATs.

What Are Grantor Retained Annuity Trusts (GRATs)?

A GRAT is an irrevocable trust that allows you to transfer assets to your beneficiaries while minimizing your estate tax liability. With a GRAT, you (as “grantor”) transfer assets into the trust and retain the right to receive an annuity payment for a specified number of years. At the end of the term, any remaining assets in the trust are transferred to your beneficiaries.

The value of the annuity payment is determined by the IRS using an interest rate called the Section 7520 rate. If the assets in the trust appreciate at a rate higher than the Section 7520 rate, the excess appreciation is transferred to your beneficiaries free of gift and estate taxes.

What Are Rolling GRATs?

A Rolling GRAT is a strategy that involves creating a series of GRATs, each with a short term, and “rolling” the assets from one GRAT into the next. This allows you to continue transferring assets to your beneficiaries while minimizing your estate tax liability.

When establishing a Rolling GRAT, you (as “Grantor”) create a short-term GRAT (usually two or three years). The GRAT is “zeroed out” – that is, due to the IRS method for calculating the value of your retained interest in the trust and value of the remainder interest, the taxable gift to the trust is nominal and uses virtually no lifetime gift tax exemption.

At the end of the GRAT term, assuming you survive the term of the GRAT, the balance of the GRAT assets is distributed to the remainder beneficiary, which is often an irrevocable “receptacle” trust for the benefit of your family.

As Grantor, you then “roll” the assets returned in the form of the annuity payments into another GRAT and continues to do this at the end of each GRAT term. This continually removes assets from your estate.

Rolling GRATs

Benefits of Rolling GRATs

Nominal Use of Gift Tax Exemption

The amount gifted to a rolling GRAT uses almost none of your lifetime federal gift tax exemption. As a result, assets are removed from the estate while preserving his or her estate and gift tax exemption.

Flexibility in Asset Selection

With Rolling GRATs, you have the flexibility to choose which assets to transfer into each trust. This allows you to strategically select assets that are likely to appreciate, maximizing the potential tax savings for your beneficiaries.

Retained Use of Assets

As Grantor, you can transfer a significant amount of assets to the GRAT without concern because most of the assets will be returned in the form of annuity payments (see example below).

Protection Against Market Volatility

One of the risks of traditional GRATs is that if the assets in the trust do not appreciate at a rate higher than the Section 7520 rate, there may be no tax savings for your beneficiaries. However, with Rolling GRATs, you can mitigate this risk by continuously rolling assets into new trusts. This allows you to take advantage of market fluctuations and potentially increase the tax savings for your beneficiaries.

Additional Considerations

Initial Cost and Maintenance: Rolling GRATs are a complex estate planning tool, and therefore can be costly to implement and maintain.

Low Risk. If you do not outlive the GRAT term, the value of the GRAT will be included in your estate and subject to estate tax. However, you will have used such a small amount of gift tax exemption, he or she is no worse off than if the GRAT had not been created.

Tax Reduction. So long as the investment performance of the assets contributed to the GRAT exceeds the Section 7520 rate, there will be a remainder passing free of estate tax.

Rolling GRATs offer a powerful strategy for individuals looking to transfer wealth to their beneficiaries while minimizing estate tax liability. Due to the complex nature of rolling GRATS, working with an MAI financial advisor and an estate attorney can help ensure that Rolling GRATs are the right choice for your estate planning needs. Reach out to an MAI advisor to find out if this strategy is right for you.

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Information updated as of March 26, 2024. This is for educational purposes only.  The opinions and analyses expressed herein are subject to change at any time. Any suggestions contained herein are general, and do not take into account an individual’s or entity’s specific circumstances or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. Distribution hereof does not constitute legal, tax, accounting, investment, or other professional advice. Recipients should consult their professional advisors prior to acting on the information set forth herein. In accordance with certain Treasury Regulations, we inform you that any federal tax conclusions set forth in this communication, were not intended or written to be used, and cannot be used by any taxpayer, for the purposes of avoiding penalties that may be imposed by the Internal Revenue Service.

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