Increasing-annuity payments make GRAT more attractive.An increasing-annuity grantor An individual who conveys or transfers ownership of property. In real property law, an individual who sells land is known as the grantor. grantor n. retained annuity annuity: see insurance. annuity Payment made at a fixed interval. A common example is the payment received by retirees from their pension plan. There are two main classes of annuities: annuities certain and contingent annuities. trust (GRAT GRAT Grantor Retained Annuity Trust ) 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 pre·de·ter·mine v. pre·de·ter·mined, pre·de·ter·min·ing, pre·de·ter·mines v.tr. 1. To determine, decide, or establish in advance: 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 A phrase used to describe the ownership, management, and operation of a corporation by a small group of people. In a closely held corporation, the same people often act as shareholders, directors, and officers, and no outside investors exist. 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 in-kind adj. Given in goods, commodities, or services rather than money: cash and in-kind benefits. 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 (1,558,120) Benefit of using increasing-annuity GRAT $204,440 The benefits of using an increasing-annuity GRAT increase as the rate of income or appreciation generated by the GRAT increases. For example, if the value of the GRAT grew 30% each year rather than 20%), the benefit of using the increasing-annuity GRAT would rise to $273,160: Beginning balance 1,000,000 Year 1 appreciation 300,000 Year 1 annuity (70,000) Year 2 appreciation 369,000 Year 2 annuity (84,000) Year 3 appreciation 454,500 Year 3 annuity (100,800) Year 4 appreciation 560,610 Year 4 annuity (120,960) Year 5 appreciation 692,505 Year 5 annuity (145,152) Value of property passing to children under increasing-annuity GRAT arrangement 2,855,703 Value of property passing to children under a 12.5% level-annuity GRAT arrangement (2,582,543) Benefit of using increasing-annuity GRAT $273,160 Estate tax issues If a grantor dies during the increasing-annuity GRAT term, the amount of GRAT property includible in the grantor's gross estate under Sec. 2036 is generally equal to the amount of trust principal necessary to generate the grantor's increasing annuity payments, assuming an annual rate of return equal to the Sec. 7520 rate in effect on the date of the grantor's death. However, in Letter Ruling 9345035, the IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. ruled that when a grantor dies during a GRAT term, the GRAT's entire date-of-death value was includible in the grantor's gross estate under Sec. 2039. Thus, it may be necessary to avoid the provisions of Sec. 2039 to prevent the inclusion of the entire date-of-death value of a GRAT in the grantor's estate. |
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