Did you know the COVID-19 public health crisis has prompted a surge in estate planning? While it may be more challenging to meet, since most of us are tied to our homes, many people are crafting or updating their wills, trusts, and health care documents. Further, the economic downturn caused by nationwide stay-at-home orders and closures of non-essential businesses meant to contain the virus has created rare estate planning opportunities to save on gift and estate taxes. 

Let us explain more as this is especially important for families with money to protect and legacies that they want to create. For example, consider the Grantor Retained Annuity Trust, or GRAT. It is an irrevocable trust that allows for the person establishing the trust, known as the grantor, to pass a significant amount of wealth to family members with little or no gift tax cost. 

How does it operate? Once established, the grantor transfers estate assets to the GRAT which in turn pays the grantor an annuity for a limited period of time. The annuity payments derive from an IRS interest rate called the 7520 rate. The grantor also retains the right to receive the original value of the assets contributed to the trust upon its expiration. Anything left over would go to the grantor’s family members, or another trust benefiting the grantor’s family, tax-free. 

Why would someone set up an irrevocable trust only to receive the original value of the trust’s assets? Appreciation. When estate assets are undervalued and placed in a GRAT, the grantor can receive annuity payments and recoup the original value of the assets while his or her beneficiaries receive the appreciation on the assets. 

Imagine a stock portfolio that is down 20 percent since the COVID-19 bear market began. Placing the depressed investments into a GRAT offers tax-free gains for the trust’s beneficiaries if the investments appreciate in value over the multi-year term of the GRAT. Normally, transferring assets to an irrevocable trust for the benefit of others is deemed a gift for federal gift tax purposes. With a GRAT, however, the IRS looks the other way, minus a nominal interest rate, because the transferred assets can come back to the grantor. So the value of the “gift” is theoretically zero.

Grantor Retained Annuity Trusts may be both timely and highly advantageous to high-net-worth families, but they are also complicated and depend on a number of factors specific to individual estates. We know you may have questions and we are here to answer them. Even if you cannot come into the office, give us a call so that we can provide the guidance you need on this important issue.