The Section 7520 rate is low at the present time, and this makes the zeroed out GRAT strategy attractive to many people seeking avenues that provide tax efficiency.
In the realm of estate planning a GRAT is a grantor retained annuity trust. You as the grantor name a beneficiary, and you receive annuity payments from the trust throughout its term.
The IRS adds anticipated interest earnings to the trust’s value using the Section 7520 rate. As this is being written (July of 2013) the Section 7520 rate is just 1.4%.
To zero out the grantor retained annuity trust you make the appropriate calculations and accept annuity payments equal to the entire value as it has been determined by the Internal Revenue Service.
How does this help the beneficiary? Because the strategy was implemented when the Section 7520 rate was low there is a very good chance that the actual interest that is earned by the assets will be greater than the rate that was applied by the IRS.
If this is the case the strategy was successful and the beneficiary will inherit the remaining resources free of taxation.
The federal estate tax exclusion is $5.25 million this year. If you have assets that exceed this amount you may want to consider the possibility of conveying some resources into a grantor retained annuity trust for the benefit of a loved one.
Should you be interested in discussing this and other advanced tax efficiency strategies with a licensed professional contact our firm to request a free wealth preservation consultation.
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