How to maximize gifting with a GRAT

How to maximize gifting with a GRAT

Group News posted in on 8 November 2017| comments
audience: The Boston Foundation | last updated: 8 November 2017
A GRAT is an irrevocable trust that pays a fixed annuity to you, as the grantor, for a fixed term of years. The balance of the property held in trust at the end of the fixed term of years is paid to your children or others (remainder beneficiaries) outright or in trust. The purpose of the GRAT is to transfer future appreciation in the GRAT assets to your remainder beneficiaries for a nominal gift tax. For example, if you established a two (2) year GRAT in October 2017 and if the appreciation on the GRAT Assets exceeded 2.2% (the hurdle rate for the GRAT) then any appreciation over 2.2% would pass to your remainder beneficiaries at the end of the term. As the grantor, you would receive back the value of the assets that you put into the GRAT, plus a return of 2.2%.

Use of multiple GRATs allows a grantor to make focused “bets” on certain sectors in the stock market, generally using publicly traded securities. It is also an excellent vehicle for a closely held business expected to appreciate in value and ideal for one that produces cash distributions as illustrated below. Use of closely held businesses also allows the opportunity to reduce the value based on minority and marketability valuation discounts.

John as grantor transfers $10,000,000 of Business LLC non-voting membership interests to a two-year GRAT. John sets the annuity amount sufficiently high so that a nominal gift results from the funding. John names a trust for his children as the remainder beneficiaries. Assume that the LLC appreciates at an annual rate of 5% and produces an annual cash flow distribution of 2%. Based on these assumptions would yield the following results:

“Investment” in GRAT


Gift on creation of GRAT


Annual annuity payable to grantor (based on the applicable IRS rate)


Total amount paid back to grantor over the life of the GRAT


Amount distributable to trust for children at end of year two free of tax

$ 764,418


The annuity payment would be comprised of a combination of cash flow distributions from the LLC paid to the GRAT and LLC membership interests.

Use of the GRAT as illustrated above does not deplete the grantor’s estate, but it does facilitate the removal of future growth and income. If the assets selected for the GRAT do not grow as expected, nothing is gained but nothing is lost. The technique may be repeated until favorable results occur.

With interest rates still at historic lows, you should consider a GRAT as part of your gifting strategy.

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