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GRANTOR ANNUITY TRUST IN ESTATE PLANNING
The concept of transferring assets to your beneficiaries at a reduced tax cost is accomplished through the utilization of a Grantor Retained Annuity Trust (GRAT). Firstly the creation of the trust is necessary and the Grantor contributes assets to fund the trust entity; thereafter, the trust pays the Grantor a fixed amount annually for a fixed term of years through the acquisition of an annuity.
In the creation of the trust the grantor is making a taxable gift of the amount that will eventually pass to the beneficiaries of the trust at the determined trust distribution date. The amount of the gift is the difference between the value of the assets contributed to the trust and the present value of the annuity payments that you will receive from the trust; this determination requires the calculation of the "present value" of the future annuity payments. The Internal Revenue Service will assign a certain rate of return considering the assets transferred to the trust; the higher the "present value" of the annuity, the lower the value of the assets that will pass to the trust beneficiaries and therefore the lower the amount of the gift for gift tax consideration.
It is possible to eliminate the gift tax due when the trust is created IF the trust provides that in the event you predecease the trust term, the remaining annuity payments will be paid to your estate. Therefore, select an annuity rate that, under Internal Revenue Service calculations, results in a zero value for the assets passing to the beneficiaries at the end of the trust term. If your death occurs during the trust term, the value of the annuity payments paid to your estate will be included in your taxable estate for estate tax calculations.
In the event the trust produces a return in excess of the Internal Revenue Service required interest rate and you survive the trust term, the extra appreciation passes without gift taxation to the trust beneficiaries. Alternatively if the assets "under perform" the assets will be returned to you during the term as they are in fact used to satisfy annuity payments, but you are in fact in no worse a position than when you started.
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Dear Friends, Collegues
and Clients,
There are many changes occurring in the present estate and gift tax provisions of the existing tax laws; however, gift tax repeal is not among them!! The gift tax exemption is $1,000,000 at this time and the gift taxation rate will decrease but the gift tax will not be repealed for even one year -as will the estate tax during the calendar year 2010.
Sincerely,
Steven Wayne Tarta |
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