I Want You to Stop Paying Taxes Grantor Retained Annuity Trust (GRAT)

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Federal Estate Taxes Can Destroy Wealth

Year Federal Exemption Federal Estate Tax Rate 2007 $2.0 million 45% 2008 $2.0 million 45% 2009 $3.5 million 45% 2010 Estate Tax Repealed 0% 2011 $1.0 million 55%

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State Estate Taxes Can Destroy Wealth

Top State Estate State State Exemption Tax Rate 2009 Connecticut $2.0 million 16% Delaware $3.5 million 16% Illinois $2.0 million 16% Kansas $1.0 million 3% Maine $1.0 million 16% Maryland $1.0 million 16% Maine $1.0 million 16% Minnesota $1.0 million 16% New Jersey $675,000 16% New York $1.0 million 16%

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State Estate Taxes Can Destroy Wealth

Top State Estate State State Exemption Tax Rate 2009 North Carolina $3.5 million 16% Ohio $338,333 7% Oklahoma $3.0 million 10% Oregon $1.0 million 16% Rhode Island $675,000 16% Tennessee $1.0 million 9.5% Vermont $2.0 million 16% Washington D.C. $1.0 million 16% Washington $2.0 million 19%

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Understanding a Grantor Retained Annuity Trust

A Grantor Retained Annuity Trust (GRAT) is an irrevocable trust created by a person (the “Grantor”), who transfers assets into the trust and receives a stream of annuity payments from the trust for a specified term. At the end of the term the remaining assets of the GRAT are distributed to the beneficiary (the “Remainderman”) or placed into a trust for the benefit of the beneficiary.

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Understanding a Grantor Retained Annuity Trust

The Grantor can avoid gift taxes from transfers if the GRAT is “zeroed out”. Translation: the full amount transferred in is paid back to the grantor.

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Understanding a Grantor Retained Annuity Trust The minimum stream of payments for the term of the trust is determined by the Internal Revenue Code 7520 Interest Rate, oftentimes called a “hurdle rate”. The October 2009 rate of 3.2% is significantly lower than the 6.2% rate as recent as August 2006, making the GRAT more appealing now than many periods over the last 10 years.

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Understanding a Grantor Retained Annuity Trust The primary reason for establishing a GRAT is to remove net profits from the estate, with net profits defined as any excess return above the hurdle rate.

The lower the hurdle rate, the easier it is to remove more assets from your estate.

Translation: it is easier to earn more than 3.2% than it is to earn more than 6.2%.

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Example of Grantor Retained Annuity Trust (GRAT)

Grantor Transfers Assets to GRAT with $1,000,000 10 Year Term Grantor Receives IRC Section 7520 Interest $ 320,000 Rate of 3.2% Each Year for 10 Years Grantor’s Assets Returned $1,000,000

But…

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Example of Grantor Retained Annuity Trust (GRAT) Over the 10 Years, Assets Grew to $2,200,000 After Grantor’s Original Asset Returned ($1,000,000) Remainderman Receives Balance $1,200,000

And…

Grantor Removes Same Amount from Estate $1,200,000 Gift Tax and Estate Tax Free

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Conclusions Federal and state estate taxes can destroy wealth. GRATs remove net profits from the estate. Establishing a GRAT with a low hurdle rate increases the likelihood of removing a larger amount of assets from your estate – potentially eliminating your federal and state estate tax obligations.

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Aaron Skloff, AIF, CFA, MBA Chief Executive Officer Skloff Financial Group

908.464.3060

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