GRATs: An Appealing Estate Planning Technique When Interest Rates or Asset Values are Low

The financial crisis surrounding the COVID-19 pandemic has created an interest rate environment that is very favorable to estate planning. One of the most compelling estate planning opportunities amidst low interest rates is the establishment of a Grantor Retained Annuity Trust (GRAT).

A GRAT is an irrevocable trust into which an individual (the grantor) can transfer assets and receive an annual payment (annuity) of a fixed dollar amount for a specified period of time (GRAT term). They present an appealing opportunity to transfer assets to beneficiaries free of estate or gift tax. When the GRAT is established, the amount of the annuity is calculated using the Section 7520 interest rate at that time (called the hurdle rate). At the end of the GRAT term, the trust’s remaining assets pass to the designated beneficiaries.  A GRAT can be funded with a wide range of investments. During it’s time, annuity payments are made from the trust to the grantor until principal plus an assumed interest rate (specified by the IRS under Section 7520) has exhausted the trust.

For September of 2020, the hurdle rate is 0.4%, an all-time low. Previously, the lowest rate had been 1.0% in January of 2013. This presents an unprecedented opportunity to maximize the opportunities related to assets that can be passed on to your beneficiaries tax-free. As interest rates rise, the value of the assets contained in the trust should outpace the current interest rate. The additional appreciation earned from the increases in the interest rate have the potential to be higher now than they have ever been before. If the interest rates do not rise or increase, you will simply be paid back in annuities the amount that you had originally deposited into the trust plus interest.

If you are interested in learning more about this and other estate planning opportunities, contact your Anchin Relationship Partner or Anthony Parrelli and Androula Constantinou, members of Anchin Private Client, at 212.840.3456 or [email protected].