Estate Tax Strategy for Appreciable Assets

There are estate tax efficiency strategies that can be implemented if your estate is subject to taxation. The ideal tool, or set of tools, will depend upon the unique set of circumstances and the nature of the assets that you are transferring.

A grantor retained annuity trust or GRAT can be part of your wealth preservation plan if you are in possession of appreciable assets. Before we explain the details, we should take a look at the estate tax parameters so that you can determine whether or not your estate is going to be exposed.

Transfers between citizen spouses are always going to be tax-free, because there is an unlimited marital deduction. Assets transfers to anyone else are potentially subject to the estate tax, but there is a $5.43 million credit or exclusion. This is the amount that you can transfer before the estate tax would be applied.

In addition to the estate tax, there is also a federal gift tax, and the two taxes are unified under the tax code. The exclusion is a unified exclusion that applies to transfers that take place while you are living or after you pass away. So, if you used all of your exclusion giving gifts while you are living, there would be nothing left to apply to your estate after you are gone.

Zeroed Out GRAT

Now that you understand the background information, we can look out the zeroed out GRAT strategy. You want to convey highly appreciable assets into the trust, and you will receive annuity payments throughout the duration of the trust term. In the trust declaration, you name a beneficiary to assume ownership of any remainder that may be left in the trust after the expiration of the term.

You may or may not be giving a gift to the beneficiary depending upon the amount of the distributions that you take from the trust. However, since a gift may be given, the gift tax is applicable. To account for this possible transfer, the IRS adds anticipated interest accrual to the taxable value of the trust. They do this through the utilization of the hurdle rate, which is 120 percent of the federal midterm rate.

The idea is to zero out the grantor retained annuity trust. This means that you take the entire taxable value of the trust in annuity payments over the length of the trust term. Theoretically, there would be nothing left for the beneficiary.

However, you funded the trust with highly appreciable assets, so they may outperform the hurdle rate that was applied by the IRS. If this is the case, a remainder would exist, and the beneficiary would assume ownership of the remainder free of the gift tax.

Schedule a Consultation

If you would like to explore wealth preservation strategies, send us a message through this link to set up a consultation: Smithtown Long Island Estate Planning Attorneys.

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Mark S. Eghrari, Estate Planning Attorney

Mark S. Eghrari is an attorney in private practice in Smithtown, New York. He has been in practice since 1988. Mark S. Eghrari provides extensive estate and tax planning services to individuals and businesses. Mr. Eghrari’s primary focus is helping clients avoid probate, minimize or eliminate Federal and State Estate taxes and protect their assets from the high cost of nursing care, if they become ill.

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