If you are exposed to the federal estate tax, tax efficiency is going to be very important to you. The wealth that you have been able to accumulate throughout your life can be eroded significantly by this tax, because it carries a 40 percent maximum rate.
The federal estate tax credit or exclusion is $5.34 million in 2014, and it will be $5.43 million in 2015. This is the amount that you can transfer to people other than your spouse tax-free. If you are transferring more than this, the estate tax is a factor for you.
There are various different tax efficiency strategies that can be implemented, and one of them is the zeroed out GRAT strategy. In an estate planning context, this acronym stands for a grantor retained annuity trust.
Volatile Assets
To implement this strategy, you fund of the grantor retained annuity trust with assets that you expect to appreciate considerably during the trust’s term. When you are creating the trust agreement, you name a beneficiary who would assume any remainder that may be left in the trust after the term expires.
Since there is a beneficiary who could be assuming ownership of the remainder that could be left in the trust, the gift tax could be applicable. The Internal Revenue Service accounts for anticipated interest by adding 120 percent of the federal midterm rate. This is alternately referred to as the hurdle rate.
As the grantor of the trust, you receive annuity payments throughout its term. You decide on the amount of these payments.
The idea is to zero out the grantor retained annuity trust. You calculate the annuity payments to equal the entire taxable value of the trust.
If the Internal Revenue Service was accurate in its application of anticipated interest using the hurdle rate, there would be nothing left in the trust for the beneficiary. This is what the IRS would theoretically be expecting.
However, in the beginning, you made an effort to fund the trust with appreciable assets. If you were on the money, there will in fact be something left in the trust after the expiration of the term.
The beneficiary would assume ownership of this remainder in a tax-free manner.
Explore Estate Tax Efficiency Strategies
If you are in possession of appreciable assets, a zeroed out grantor retained annuity trust can be an effective component within a broader tax efficiency plan. However, the optimal course of action will vary depending on your unique personal situation.
Personalized attention is the key to a well constructed estate plan, and our firm can help if you are looking for answers.
We offer free wealth preservation consultations, and you can send us a brief message through this page to set up an appointment: Houston TX Estate Planning Attorneys.
Stephen A. Mendel, Estate Planning Attorney
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