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Why is a GRAT the perfect game plan for this economy?

What is the good part of this economic down turn that you are not getting?What positive action can you take to benefit from 2009 conditions? When values are low and expected to rise, the stage is set for a gift. You have the potential to live beyond 100. If that happens, your children will be 70 and still waiting for their inheritance. So, why not transfer wealth now?

Under current law, you can give $1,000,000 during life without gift tax and pay 45%on any taxable gift over that amount. The same 45% rate applies to estates over $3,500,000. If you have already used your $1,000,000 gift exemption, or want to preserve it, then what should you do?The best strategy is to get future appreciation out of your estate and into the hands of your appreciative children. So,how can you make a gift that is not really a gift?Consider the GRAT: You get the value of the gift back along with what the IRS considers a fair rate of return. If you out perform the IRS rate, the children get the “upside.” Technically, GRAT stands for “Grantor Retained Annuity Trust.” A friendlier acronym interpretation might be: Gift Returns Appreciation Transfers.


You create an irrevocable trust, you can be trustee and report income on your tax return. You decide what to put in, how long the trust should last,and how often you will take annuity payments. The GRAT can hold anything: cash, public or private stock or real estate. With the goal of paying little or no estate tax, your advisor calculates the annuity amount by using the IRS’s published “applicable federal rate" (known as the 7520 rate). The May 2009 rate is 2.4%. As one of the lowest rates ever, this rate is a primary motivator to create a GRAT now. If you think you can achieve more than a 2.4% return over, say, the next five, 10 or 20 years, then you should consider funding a GRAT immediately.


For pessimists, the GRAT could be a useless drafting expense should you die during the term,or if values drop so much that you get back everything and nothing passes to the children. Still,there is no adverse tax consequence. For optimists, the GRAT offers the satisfaction of your children receiving wealth while you can watch and guide them, and of course, the joy of doing so with little or no tax.

IRS CIRCULAR 230 DISCLOSURE: In accordance with U.S. Treasury Regulations, we inform you that any tax advice contained in this communication is not intended or written to be used and cannot be used by any taxpayer for the purpose of avoiding tax penalties that may be imposed under the Internal Revenue Code, nor can it be used in connection with promoting, marketing or recommending any transaction or tax-related matter.

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