Why Setting Up a Grantor Retained Annuity Trust During COVID-19 Could Significantly Maximize Assets You Pass onto Beneficiaries
There is no question that although COVID-19 has brought a tremendous amount of devastation and panic to our country and economy, there are, at the same time, some unique opportunities that it has introduced into estate planning that have to do with instruments that have been put in place precisely to benefit from growing during a time when the economy improves after something as shocking as a pandemic, especially for those interested in asset protection planning.
One such instrument is known as the Grantor Retained Annuity Trust (GRAT), which is an irrevocable trust created for a certain amount of time (typically a set number of years) that allows a grantor to transfer assets into the trust and pay out an annuity each year in exchange for their beneficiaries receiving those assets tax-free when that time period is up. The reason why setting up a trust like this could be very beneficial at this time is because asset values are extremely depressed and as the IRS ‘hurdle rate’ is at a historic low, meaning that once we are past the pandemic, if the rates of return are even at an average rate, a GRAT will result in a significant amount of wealth being transferred to beneficiaries tax-free, as we explain below.
How The GRAT Works
In a nutshell, this is how it works:
- The grantor transfers assets (ideally those with strong appreciation/growth potential) into an irrevocable trust for a fixed period of time (often between two and 10 years)
- The grantor takes an annuity each year, which is calculated based on the Internal Revenue Code 7520 rate and is currently very low (.8 percent compared to this same time last year, when it was at 3.2 percent). The lower the rate, the more likely the GRAT will be successful because it is easier for the investments in the GRAT to outperform this rate (hence why it is sometimes referred to as a ‘hurdle rate’)
- When the trust ends (based on the number of years the grantor has established it for), the beneficiaries receive their assets free of estate and gift taxes
The only risk associated with a GRAT is that if the stock underperforms the hurdle rate, the grantor receives all of their assets back, the beneficiaries do not receive anything, and the grantor is out the cost of preparing the documents. Also note that it is the grantor who pays income taxes on the assets in the GRAT.
Contact Our Florida Estate Planning Attorneys to Find Out More
For any and all questions and concerns related to estate and/or asset protection planning, contact the Orlando estate planning attorneys at Gierach and Gierach, P.A. today for a free initial consultation. We are committed to helping you set up the right combination of instruments to protect your assets and beneficiaries.