Articles & Alerts

Do you own thoroughbred racehorses?  Do you remember the feeling of being at the track and seeing your horse win, then floating on air as you headed down to the winner’s circle?  To state the obvious, estate planning doesn’t feel even remotely like that, but it can be very satisfying to pass a chunk of money to whomever you wish – gift and estate tax-free!  One way to do this is with the use of a Grantor Retained Annuity Trust (GRAT).

A GRAT is a well-established estate planning tool.  In simple terms, the grantor contributes an asset to a trust for a specified number of years (typically 2-10) and in return, beneficiaries receive annual payments for the specified term from the trust that will return the entire initial value of the contribution plus the government mandated interest rate (currently 4.6%).  All appreciation in the trust beyond that mandated rate will pass completely gift and estate tax-free to the designated beneficiaries of the trust.

There is tremendous flexibility in the type of asset that can be used to fund a GRAT.  Almost anything that can be valued and is expected to appreciate can be used.  Examples include stocks, cryptocurrency, an actively traded wine collection and, of course, your thoroughbred horse.

See the illustration below for how a racehorse GRAT would work using an actual taxpayer fact pattern:

The filly was purchased as a yearling on October 25, 2016, for $50,000.  By the following fall, in September 2017, she was just about ready to race, and an appraisal pegged her value at the original purchase price.  With this valuation in hand, a 98% ownership interest in the filly plus $60,000 in cash to cover a year of training expenses was contributed to a GRAT.  The total contribution to the GRAT equaled $109,000.  With a 3-year term and the mandated interest rate for September 2017 of 2.4%, the annual annuity payment would equal about $39,000.

She made her debut on October 25, 2017, and finished in second place. She broke her maiden (note, for those non-horse racing fans – broke her maiden means she got her first victory!) in her fourth start in February 2018.  Three weeks later, she won an allowance race by 11 ½ lengths.  She then ran in four graded stakes with two second place finishes and two fourth place finishes.  The stars then aligned for her next start, and she won the Alabama, a Grade 1 stake at Saratoga.  That pushed her career earnings to $699,000.  She would only start twice more due to some injuries and did not hit the board in either race.  She was sold at auction in November 2019 for $2.3 million.

After making all the required annuity payments and paying 98% of all expenses, there was roughly $2.5 million passed tax-free via the GRAT to the trust beneficiaries.

Obviously, not every horse will become a Grade 1 winner and not every asset will appreciate during the GRAT term.  If the assets fail to appreciate to at least cover the mandated annuity payments, all the assets contributed simply revert to the grantor and they are in no worse position than they were if they had not formed a GRAT, save for the expenses to set up and administer the GRAT.

If you want to lower your estate tax bill and have assets that are ripe to appreciate, a GRAT might be a wise tool to consider. For more information, please contact your Anchin Relationship Partner or Tom Brignati, a Director in Anchin Private Client.  Lastly, if you recognized the horse from the example as Eskimo Kisses, you are absolutely someone I would love to connect with. My direct line is 212-863-1217.