Update on GRAT LegislationMay 07, 2010
For several years, estate planning attorneys have been warning clients that Congress might soon curtail some popular wealth transfer techniques, foremost on the list being possible statutory restrictions on the effectiveness of Grantor Retained Annuity Trusts ("GRATs").
Early in 2009, commentators suggested that Congress was considering a requirement, similar to charitable remainder trusts, that a GRAT remainder interest have an actuarial value equal to at least 10% of the total transfer. Although a 10% remainder interest requirement for GRATs generated a great deal of discussion among estate planners, to date there has been no legislative action on the subject.
On May 11, 2009, the Treasury Department issued the Greenbook - which contains the Administration's Revenue proposals - and referenced a desire to restrict the effectiveness of GRATs as a tool to pass wealth by imposing a 10-year term minimum for GRATs. A 10-year term requirement is designed to minimize the advantages of shorter-term GRATs with highly appreciating assets, as well as increase the risk that a Grantor's death might occur during the GRAT term, causing the assets remaining in the GRAT at that time to be included in the Grantor's Estate at death.
The House of Representatives took the first step toward statutory GRAT regulation on March 24, 2010 when it passed H.R. 4849. The anti-GRAT provisions were included as a revenue-raiser in the Small Business and Infrastructure Jobs Tax Act of 2010. The legislation extends the minimum term of a GRAT from 2 years (the current minimum) to 10 years. Although the legislation does not require a specific value for the remainder interest of a GRAT, the legislation indicates that said interest must be "greater than zero." By eliminating the availability to "zero out" a GRAT, the legislation ensures that gifts to GRATs will be taxable gifts which must be reported on a Federal Gift Tax Return. As a practical matter, the requirement of a greater than zero remainder interest should not affect most of our clients as we have generally recommended that clients make and report at least a small taxable gift with each GRAT transaction in order to start the three year statute of limitations applicable to adequately disclosed gifts.
The final drawback of the House bill is that it takes away the ability to utilize what is sometimes referred to as a "declining annuity GRAT" -- at least during the first 10 years of the GRAT term. A declining annuity GRAT provides for a higher initial annuity payment in year one, with lower annuity payments in subsequent years. Using "rolling" declining annuity GRATs has become popular in recent years to "lock in" potential large gains that might occur in a single year of the GRAT term and to ensure that poor performance in future years does not affect that gain.
As of the date of this update, the Senate has not considered GRAT legislation similar to H.R. 4849. If the new GRAT legislation is passed by the Senate and signed by the President, the law would apply only to GRATs put in place after the bills final passage. Clients who have been considering a GRAT in connection with their estate planning should contact their estate planning attorney to discuss whether establishing a new GRAT under present law is appropriate at this time.