What You Should Know About Your GRAT (Grantor Retained Annuity Trust)

Noel C. Ice
Cantey & Hanger, L.L.P.
2100 Burnett Plaza
801 Cherry Street
Fort Worth, Texas 76102-6898
(817) 877-2800 (Cantey & Hanger Receptionist)
(817) 877-2885 (Ice Direct Line)
(817) 878-2944 (Secretary)
(817) 877-2807 (FAX)
E-mail: Ice@ABAnet.org
http://www.trustsandestates.net/

Copyright 2003
Noel C. Ice
All rights reserved.


TABLE OF CONTENTS

What You Should Know About Your GRAT (Grantor Retained Annuity Trust)
How To Make LARGE Gifts WithouT Paying Gift Tax
or Using AnY Gift Tax Unified Credit


By Noel C. Ice

What You Should Know About Your GRAT (Grantor Retained Annuity Trust) 1

BASIC............ ............ 1

WHAT IS A GRAT?. 1

HOW DOES A GRAT WORK?. 1

WHAT ARE SOME EXAMPLES OF HOW A GRAT MIGHT WORK?. 1

What Is the Theoretical Size of a Remainder Interest in A $10 MILLION, 10-YEAR, GRAT, FOR A 65 YEAR OLD, IF THE Assumed After Tax Rate of Return IS 3%?  2

What is the Gift Tax Value of the Remainder Interest According to the IRS?  2

Is the IRS’ Position Logical?. Error! Bookmark not defined.

What is the Value of the Gift to the Remainder Beneficiaries if the IRS is Right, and What is the Value if the Tax Court is Right?. Error! Bookmark not defined.

What is a Quick Example of What the Remainder Beneficiaries Get Under the Facts Just Recited?. 2

Can a Person Make a MultI-Million Dollar Gift Without Paying Gift Tax?. 4

Are THere Tax Savings to Be Had, Even if Walton Does Not Apply?. 4

HOW DOES A GRAT COMPARE WITH AN OUTRIGHT GIFT?. 5

What Are Some Examples of How an Outright Gift Might Compare to a GRAT?  5

What Size Outright Gift WOuld Produce a $7,253,895 at the End of 10-Years, at a 10% Growth Rate?. 6

Why Does the Math Produce Such Favorable Results For a GRAT When Compared to an Outright Gift, When the  Return Rates Substantially Exceed the §7520 Rate?. 6

WHAT ARE THE RESULTS OF A $10 MILLION 10-YEAR GRAT IF WALTON APPLIES, AND IF THE §7520 RATE IS 3%, AND IF THE GRANTOR SURVIVES THE 10-YEAR TERM?. 7

Why is It that The Value of the Remainder Under a GRAT is Less if the Interest Rate Assumption is Lower?. 7

Why is It that The Value of the Remainder Under a QPRT (House GRIT) is Less if the Interest Rate Assumption is Higher?. 9

Why is a GRIT more Effective if the Actual Rate of Return Is Low?. 10

How Do Income Taxes Figure into the Economic Analysis?. 10

WHAT IS THE INTEREST RATE USED FOR GRAT TAX CALCULATIONS; i.e., WHAT IS THE §7520 RATE?. 12

WHY IS A GRAT AN ATTRACTIVE ESTATE PLANNING TECHNIQUE?. 12

WHY IS IT IMPORTANT FOR GIFT TAX PURPOSES, THAT A RETAINED INTEREST Be A “QUALIFIED INTEREST”?. 13

WHAT IS THE “SUBTRACTION METHOD” FOR VALUING A GIFT?. 13

WHAT IS A GRIT AND HOW IS IT DIFFERENT FROM A GRAT?. 14

HOW IS A GRIT TAXED FOR TRANSFER TAX PURPOSES IF A BENEFICIARY IS AN APPLICABLE FAMILY MEMBER?. 15

WHO IS AN APPLICABLE FAMILY MEMBER?. 15

WHAT IF NONE OF THE BENEFICIARIES OF THE GRIT IS AN APPLICABLE  FAMILY MEMBER. 15

WHAT EXACTLY IS A GRAT?. 15

WHAT IS A QUALIFIED ANNUITY INTEREST?. 16

WHY DID CONGRESS REQUIRE THE ANNUITY TO BE A FIXED RATE?. 16

WHAT HAPPENS IF THE GRANTOR DIES PRIOR TO THE EXPIRATION OF THE TERM INTEREST?  16

What is the §2001(b)(2) Adjustment?. 17

WHO CAN BE THE TRUSTEE OF A GRAT?. 18

CAN THE ANNUITY IN A GRAT INCREASE EACH YEAR?. 19

CAN THE ANNUITY IN A GRAT DECREASE EACH YEAR?. 20

WHAT IS THE INFAMOUS EXAMPLE 5?. 20

IF EXAMPLE 5 IS GOOD LAW, CAN THE GIFT EVER BE REDUCED TO ZERO?. 21

WHAT WERE THE FACTS IN THE WALTON CASE?. 21

WHAT WAS THE ISSUE IN THE WALTON CASE?. 23

WHAT WAS THE HOLDING OF THE WALTON CASE?. 24

WHAT IS THE EFFECT OF THE WALTON CASE ON THIS MEMO?. 25

CAN A GRAT BE AMENDED?. 25

CAN A GRAT SATISFY THE ANNUITY WITH A PROMISSORY NOTE?. 25

IS IT PERMISSIBLE TO HAVE A GRAT WHERE THE ANNUITY EXCEEDS 50% OF THE INITIAL VALUE OF THE GRAT CORPUS, OR WHERE THE REMAINDER IS LESS THAN 10% OF THE INITIAL VALUE?. 26

Might thE Ruling Provision Just Discussed Become the Basis For Future Legislation?. 27

WILL A GRAT QUALIFY IF THE ACTUARIAL ASSUMPTIONS LEAD TO THE CONCLUSIONS THAT THE GRAT WILL BE EXHAUSTED?. 27

HOW IS A GRAT TAXED FOR INCOME TAX PURPOSES?. 28

IS A GRAT A GRANTOR TRUST?. 29

How Are Grats Taxed?. 28

CAN A GRAT REQUIRE THAT THE GRANTOR BE REIMBURSED FOR INCOME TAXES ATTRIBUTABLE TO THE ANNUITY?. 29

MUST A GRAT REQUIRE THAT THE GRANTOR BE REIMBURSED FOR INCOME TAXES ATTRIBUTABLE TO THE ANNUITY?. 29

IS THE FAILURE TO REIMBURSE  THE GRANTOR FOR INCOME TAXES A GIFT TO THE TRUST?  29

WHAT ARE THE ARGUMENTS THAT COULD BE MADE FOR DISQUALIFYING A GRAT BECAUSE IT HAS AN INCOME TAX Reimbursement CLAUSE, OR BECAUSE IT DOES NOT HAVE SUCH A CLAUSE?. 31

WHEN MUST THE ANNUITY BE PAID?. 32

Why Wait to Pay the Annuity?. 32

Can the annuity Be Paid as of the Anniversary Date of the Contribution, Rather than as of the End of Trust’s Taxable Year?. 32

When Must an Annuity be Paid, If the Annuity is Payable More Frequently thaN Annually?. 33

WHAT HAPPENS IF THE IRS DISAGREES WITH THE INITIAL VALUE PLACED ON THE TRUST ASSETS?. 33

MUST PRORATION OF THE ANNUITY AMOUNT TAKE PLACE FOR THE FIRST SHORT TAXABLE YEAR OR IF THE LAST PAYMENT IS FOR A SHORT PERIOD?. 34

MAY ADDITIONAL CONTRIBUTIONS BE MADE TO A GRAT?.