Wealth managers and tax attorneys are advising wealthy clients who may need to minimize gift and estate tax payments to consider taking advantage of a popular tax-planning tool while they still can.
Wealth managers and tax attorneys are advising wealthy clients who may need to minimize gift and estate tax payments to consider taking advantage of a popular tax-planning tool while they still can.
The increased attention to grant-or retained annuity trusts is the result of an Obama administration proposal to curtail their tax benefits. The proposal is included as part of the White House's revenue plan for 2010.
“If someone is considering doing a GRAT, they should do it now,” said Patricia Soldano, president of the Southern California region for GenSpring Family Offices LLC of Palm Beach Gardens, Fla.
“If it is consistent with their legacy goals, families should establish GRATs as soon as possible and as much as possible,” said Ray Odom, a senior vice president and director of wealth transfer services for Northern Trust Corp. of Chicago.
Taxpayers now have a “unique opportunity” to act, he said, because interest rates are historically low, assets may have a depressed market value, and there is a “clear structural authority” for a tax-planning technique such as a GRAT.
A GRAT is an irrevocable trust that potentially allows the grantor to pass on much of the appreciation of an asset to heirs, free of gift tax.
But if the trust grantor dies during the term of the GRAT, the asset will be included in the grantor's gross estate and be subject to estate tax, which could be as high as 45%.
Consequently, there has been a proliferation of GRATs that last only two years, reducing the risk of the grantor's death during the term of the trust.
As a result, the White House has proposed requiring that a GRAT have a minimum 10-year term.
“This proposal would require, in effect, some downside risk in the use of this technique,” the Department of the Treasury said in an explanation of the revenue proposals it submitted this month.
If the Obama administration's proposal becomes law, GRATs likely will become less popular and much less likely to be used by older individuals, according to wealth managers and tax attorneys.
“They will become much less attractive. If the person doesn't live for 10 years, the GRAT doesn't work,” said Denis Kleinfeld, a shareholder at Rothstein Rosenfeldt Adler in Fort Lauderdale, Fla., who specializes in gift and estate tax law.
“Fewer people over 70 will use GRATs as an estate-planning strategy if the new time horizon becomes 10 years,” said Wallace Head, executive managing director and president of the private-wealth group at The PrivateBank in Chicago.
As a result, estate planners are likely to employ other techniques, such as installment sales, as an alternative to GRATs, wealth advisers said.
“An installment sale today of an asset expected to appreciate significantly over the next few years can provide many of the benefits of a successful GRAT strategy,” Mr. Head said. “The value of the asset is frozen at today's value, cash payments are received annually for a number of years, and the amount of any taxable gift can be determined by how the sale or GRAT is structured.”
Wealthy individuals or families may also consider buying an insurance policy to cover estate tax administration or estate needs, Mr. Kleinfeld said.
“There may be more interest in insurance to cover future estate tax than relying on estate tax techniques which may be subject to adverse legislation,” he said.
New legislation may also result in more sales of the remainder interest of a GRAT, said Jennifer Pratt, a senior associate in the tax- and wealth-planning practice for Venable LLP of Baltimore.
The remainder is the amount left after the retained annuity and is typically gifted to the remainder beneficiaries, she said.
“Our solution to avoid the mortality risk, which is much greater with a 10-year mandatory term, is to sell the remainder interest of the GRAT for fair market value,” Ms. Pratt said.
As the Obama administration looks for ways to raise revenue to fund its health care plan, estate planning remains unsettled, wealth advisers noted.
“I'm telling clients to wait and see what Obama will do. Everything being proposed is in the context of health care, and the [Obama] administration is going to throw things against the wall and see what sticks,” said Dan Deighan, chief ex-ecutive of Deighan Financial Advisers Inc. of Melbourne Fla., which has an estimated $140 million in assets under management.
“It's hard to do specific planning when so much is up in the air,” Mr. Kleinfeld said. “If you have no choice and have to do something now, I would assume the proposal will go through, and plan for the most conservative worst-case scenario.”
Wealthy individuals or families should not, for example, continue to roll over a GRAT two years at a time, wealth planners said.
“The best advice is go talk to a very knowledgeable tax attorney,” Mr. Head said.
E-mail Charles Paikert at -cpaikert@investmentnews.com.
