Grantor Retained Annuity Trusts (GRATs) - an endangered species?

Talk of limiting short term GRATs has been around for a while now, but the discussion seemed to be “back burnered” with the 2010 Estate Tax repeal actually coming into effect, and no signs of life in Congress regarding any Estate Tax reform this year.  Well, that seems to have changed with the passing of HR 4849 in the House on 3/24.

Traditionally estate planners use GRATs that last 2 or 3 years to minimize mortality risk (i.e. the chance the grantor dies during the term thereby causing full estate inclusion and defeating the GRATs purpose) and that are “zeroed out” to avoid any gift tax on the transaction (i.e. the remainder interest is calculated to be worth $0 under IRS formulas even though the grantor and his advisors plan for the assets in the GRAT to appreciate significantly and thus have a large actual remainder value).

The House bill would severely curtail the use of low risk GRATs by requiring a minimum 10 year term and a remainder value greater the zero. The latter requirement doesn’t seem too onerous since no specific value is required and smart estate attorneys tend to report a remainder value of  ~$1 on the client’s Gift Tax return to start the Statute of Limitations running.  The 10 year term, though, would be a much bigger issue. While longer term GRATs actually transfer more value to the remaindermen, the previously mentioned mortality risk is always a concern.

What might this mean?  Well, for one thing, sales to irrevocable grantor trusts (“IDGT”) look more attractive. These transactions are traditionally structured for 9 year terms (but can be longer or shorter) and use more favorable interest rates than GRATs.   They have far less mortality risk since the technique “freezes” the estate tax value of the transferred asset so if the grantor dies in year 5, only part of the value of the asset is pulled back into his estate, and such value would not include any appreciation on that asset during those five years.  Had the grantor died during year 5 of a 10 year GRAT, the entire value (including appreciation) would be pulled back into his estate.  Another advantage for Sales to IDGTs is the ability to allocate GST exemption, something not permitted for GRATs – thus making them preferred tools for multi-generational transfers and Dynasty Trust creation.

Sales to IDGTs do have one significant danger: valuation risk.  Much like a GRAT, when implementing an IDGT sale, one must value the transferred assets and often will take discounts on that value for various reasons. If the IRS later challenges those values and discounts, the effect can be significant.  In a GRAT, a changed value has no effect since most GRATs are drafted using percentage payouts as opposed to fixed dollars amounts.  If an asset value changes, this language “captures”  it and no adverse effects occur.  In contrast, IDGT sales use specific dollar amounts in their provisions which means a change in asset value after the terms are set could cause the transaction to be treated as a part sale / part gift and trigger gift taxes. Furthermore, if GST exemption had been previously allocated, a new asset value might cause the Inclusion Ratio for the IDGT to change, causing a whole host of problems. (New rulings on so called “defined value clauses” can be applied to IDGTs to reduce these risks. Such a discussion is well beyond the scope of this post though)

Of course, all of this discussion may be premature – the Senate still needs to vote on the Bill and the President needs to sign it.  However, given the fact these anti-GRAT provisions are specifically designated as ”revenue raisers” for the Jobs Bill, I suspect the likelihood they will be implemented is be better than 50/50.

The current low interest rates and a rebounding economy that is causing assets to appreciate and business to start picking up means we are in a perfect environment for GRATs.  If you (or a client, if you are an advisor) are on the verge of a liquidity event (e.g. business sale, IPO, etc) or have assets that are depressed in the current market but are expected to rapidly appreciate in the coming couple of years, now is the time to get moving - there is no way to know how long this window will remain open.

As always, please don’t hesitate to contact us if you have any questions or we can be a resource to you in any way.

All the best,
Joe Donlon

The estate planning law firm of Donlon & Associates, PC provides high quality, focused legal counsel to clients all ages and wealth levels in the following areas:

Wills & Trusts
Asset Protection Planning
Advanced Planning for Business Owners & Professionals
Elder Law
Special Needs Trusts
Probate & Estate Administration

Donlon & Associates, PC provides trusts & estates and asset protection services to clients throughout New York City and Long Island, including Nassau County, Suffolk County, Queens, Brooklyn, Manhattan, and Staten Island.

New York Elder Law & Medicaid Planning News

The Regional Rates for 2010 are:

Long Island:                $11,227
NYC (5 Boroughs):       $10,285

The Regional Rates are used to determine the length of Medicaid ineligibility caused by an uncompensated transfer of assets from the applicant (or spouse) during the so called "look back period."  The "look back period" currently includes any transfers made from February 2006 onward. 


You can find the 2010 Resource (asset) Allowance and Income limits in my December 1st, 2009 post, below.

Please don't hesitate to contact us for more information.

The New York law firm of Donlon & Associates, PC focuses exclusively on:
Estate Planning
Elder Law
Asset Protection Planning
Family Business Planning

Donlon & Associates, PC
www.donlonlaw.com

The State of Estate Taxation in 2010

Well, January 1 has come and gone and Congress has taken no action regarding the federal transfer tax system (estate & gifts taxes).  What does this mean?  As of 01/01/2010, the major rules are as follows:

1. There is no Estate Tax
2. There is no Generation Skipping Transfer Tax (GST)
3. The Gift Tax remains in effect, although the tax rate drops to 35%.  The annual exclusion for 2010 is $13,000, and the lifetime exemption remains unchanged ($1,000,000).
4. The "Stepped Up Basis" rule has been eliminated except for two situations:
• The first $1.3 million of built in gains (total) transferred to non-spouse beneficiaries and
• The first $3.0 million of built in gains transferred to a spouse

As discussed in previous posts, if Congress takes no action all year, on January 1, 2011, the law will change again, and the Estate Tax, GSTT, and Stepped Up Basis rules come back in full force (and with higher rates and lower exemptions than what existed in 2009).

What will happen now?

No one can predict what Congress will do, but there have been assurances from important figures that estate tax reform is high on the agenda, and the intention is to pass such legislation and make it retroactive to January 2010. Many commentators question whether such a move would be constitutional.  Either way, you can be sure we'll have years of lawsuits to look forward to on this one.


I invite you to contact me directly with any questions or concerns you might have.  The new laws, regardless of how short lived they might be, provide significant tax saving opportunities for many people. At a minimum it is highly recommended that you review any documents and plans you currently have in place to ensure they will achieve the desired results for your family in this greatly altered and highly unpredictable environment.  As a dedicated estate planning law firm, Donlon & Associates continues to provide our current and prospective clients with the highest quality tax advice and legal counsel in this field.

Joseph Donlon, Esq. 

Estate Tax Changes for 2010

As I write this there are only 14 days left in 2009 and Congress has yet to take action to prevent the massive changes in the estate and gift tax laws that are to take effect on January 1st, 2010. The two biggest changes will be the elimination of the federal estate tax altogether, and its replacement with a new income tax framework which would eliminate the so called "stepped up basis" rule and implement a "carryover basis" scheme. 

The radical changes in the tax law will makes things difficult for professional advisors and their clients for a while as everyone learns the new rules, discards old planing tools, and reorients themselves.  Unfortunately, without Congressional intervention, such difficulties will be compounded just one year later (Jan. 2011) when the laws change again and the estate tax returns in full force and the "carryover basis" scheme goes away.  To add insult to injury, the renewed estate tax will be higher (up to 60% vs. 45% today) and the personal exemption amount will drop significantly (to $1 million from $3.5 million today)!

There is some small hope though.  As of December 3rd, the House has passed a bill extending the current estate tax regime ($3.5 mill exemption, 45% rate, stepped up basis rule) permanently. Unfortuantely, the Senate seems too locked in the Health Care Debate to pay much attention.

So what are estate tax experts doing? We're working hard to prepare ourselves and our clients for the worst.  Regardless of what happens, you can rest assured that those of us dedicated to this practice will be ready to provide the highest quality advice and counsel. As always, we will ensure our clients save taxes, protect their families and safeguard their assets.

If you have any questions about estate tax planning, please don't hesitate to call me (Joseph P Donlon, Esq.), or visit our website at www.donlonlaw.com.

2010 New York State Medicaid Resource & Income Allowances

NURSING HOME CARE
                                    Applicant             Community Spouse
Resource Allowance:  $   13,800               $  109,560 (maximum)
Income Allowance:     $         50/month     $      2,739/month

HOME CARE
                                    Applicant             Community Spouse
Resource Allowance:  $  13,800              $  20,100
Income Allowance:     $      767/month    $    1,117/month


The New York law firm of Donlon & Associates, PC focuses exclusively on:
Estate Planning
Elder Law
Asset Protection Planning
Family Business Planning

Donlon & Associates, PC
www.donlonlaw.com

EstateTax Planning News 12/09

IRS releases AFRs for December 2009:

Short Term: .69%

Mid Term: 2.64%

Long Term: 4.17%

The 7520 rate will be: 3.2%

For more information about Estate Tax Planning, visit us at http://www.donlonlaw.com

Big Changes in New York's Power of Attorney law

The recent changes in the law provide greater clarity and protection to clients. Key changes include:

• The new form must be signed and notarized by both the principal and the agent (the person named in the Power).
• The principal may appoint a “monitor” to review records of transactions by the agent.
• The agent has specific legal responsibilities, including a “prudent person standard of care.” He/she must maintain records of all transactions, and make them available upon written request.
• The law explicitly requires banks to accept the new Power and forbids them from requiring their own forms.
• The agent is limited to making small gifts (up to $500) unless the principal also signs a “Statutory Major Gifts Rider” which must be signed by two witnesses.
  

Old Powers (signed pre-Sept. 1st) remain effective despite the new law. However, you should consider executing a new Power to take advantage of these increased protections.

Both current and prospective clients are advised to call us immediately to discuss how this new law impacts your situation. Please review our website for more information or to schedule an appointment. 

Donlon & Associates, PC