What Is a Northern California Grantor Retained Annuity Trust? www.norcalplanners.com 1

WHAT IS A GRANTOR RETAINED ANNUITY

TRUST? “People who are in possession of assets that exceed the amount

of the federal estate tax exclusion must implement wealth preservation strategies. There are a number of different trusts that can be beneficial, and one of them is the grantor retained

annuity trust.”

TIMOTHY P. MURPHY NORTHERN CALIFORNIA CENTER FOR ESTATE PLANNING AND ELDER LAW

What Is a Northern California Grantor Retained Annuity Trust? www.norcalplanners.com 2

A grantor retained annuity trust is a wealth preservation tool that can be used by

high net worth people who are exposed to the federal estate tax when certain

circumstances exist. Before we get into the details, we should take a look at

some relevant information about the federal estate tax and the gift tax.

The federal estate tax carries a 40 percent maximum rate, and this is quite a

large number, especially when you consider the fact that your estate is

comprised of assets that you have left after paying taxes all of your life. Many

people think that the estate tax is excessive and unfair, but regardless of how

you may feel about the tax, it is a fact of life.

What Is a Northern California Grantor Retained Annuity Trust? www.norcalplanners.com 3

This death levy is only a factor for high net worth individuals, because there is a

relatively large credit or exclusion. The exclusion is the amount that can be

transferred tax-free. At the time of this writing late in 2015, the exclusion stands

at $5.43 million.

A $5 million exclusion was established for 2011, and there have been inflation

adjustments each year since then. In 2015, the figure is $5.43 million. When

2016 rolls around, the figure will be $5.45 million due to the inflation adjustment.

The bottom line is this: If your estate is valued at more than $5.5 million or so,

the portion that exceeds this amount is potentially subject to the estate tax,

unless you are transferring assets to a citizen spouse. There is an unlimited

marital deduction that allows

you to transfer unlimited

assets to your spouse free of

the estate tax.

You can't just give lifetime

gifts to avoid the estate tax,

because there is also a gift

tax that is unified with the

estate tax. The exclusion is a unified lifetime exclusion that applies to lifetime gift

giving along with postmortem asset transfers.

What Is a Northern California Grantor Retained Annuity Trust? www.norcalplanners.com 4

ZEROING OUT A GRANTOR RETAINED ANNUITY TRUST

Now that we have set the stage, we can look at the tax efficiency value of a

grantor retained annuity trust or GRAT. The idea is to fund the trust with assets

that you expect to appreciate considerably over an extended period of time.

When you create the trust declaration, you decide on a term, and you receive

annuity payments throughout the duration of this term.

You also name a beneficiary who would become the owner of anything that is

left in the trust after the expiration of the term, so the gift tax could be

applicable if there is a transfer to the beneficiary. The Internal Revenue Service

accounts for anticipated interest for gift tax purposes by adding the hurdle rate,

which is 120 percent of the federal midterm rate.

What Is a Northern California Grantor Retained Annuity Trust? www.norcalplanners.com 5

To implement this tax efficiency strategy, you want to zero out the grantor

retained annuity trust, so you take annuity payments over the course of the term

that will wind up being equal to the entire taxable value of the trust. If the trust

was to grow at a rate that exceeded the hurdle rate throughout the term, there

would be a remainder, even though you endeavored to zero out the trust.

Under these circumstances, the transfer to the beneficiary at the end of the term

would not be subject to the gift tax.

This strategy has been particularly viable over recent years, because interest

rates have been low. This is a factor that comes into play when you are

evaluating the efficacy of this approach.

SUMMARY

People who are in possession of assets that exceed the amount of the federal

estate tax exclusion must implement wealth preservation strategies. There are a

number of different trusts that can be beneficial, and one of them is the grantor

retained annuity trust.

What Is a Northern California Grantor Retained Annuity Trust? www.norcalplanners.com 6

When interest rates are low, and you are in possession of appreciable assets,

this type of trust could potentially facilitate a tax efficient transfer to a

beneficiary.

Each case is different,

and this is why

personalized attention is

key when you are

concerned about wealth

preservation. If you

discuss your unique

personal situation with a licensed estate planning attorney, you can have all of

your questions answered, and you can devise a plan that is custom crafted to

suit your needs.

REFERENCES

Internal Revenue Service https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Estate-Tax

BB&T http://www.bbt.com/bbtdotcom/wealth/retirement-and-planning/trusts-and-estates/grantor-retained-annuity-trust.page

What Is a Northern California Grantor Retained Annuity Trust? www.norcalplanners.com 7

About the Author

Timothy P. Murphy

Timothy P. Murphy is an estate planning and elder law attorney whose practice emphasizes helping people to build, preserve and pass on their wealth. He works with his clients to accomplish their goals while avoiding unnecessary court proceedings and minimizing or eliminating exposure to death taxes. Mr. Murphy also assists families facing the myriad of problems associated with dealing with a loved one’s declining health and rising needs for care. He has practiced law in the

Sacramento area for over 33 years, first with a large firm, and then with his own firm since 1987. Tim has written a regular column on legal issues for Senior Magazine. He also was a regular featured guest on the Money Experts radio program heard locally on KFBK (AM 1530). Tim has been featured in the Sacramento Bee, Sacramento Business Journal, Sacramento Magazine, Comstock’s Magazine and other publications on estate planning and related topics. He also assisted local Channel 3 (KCRA) in an investigative report on the trust mill problem in the Sacramento area and was featured on Channel 10 (KXTV) in its series on personal financial planning.

Northern California Center for Estate Planning and Elder Law www.norcalplanners.com SACRAMENTO 2277 Fair Oaks Boulevard Suite 320 Sacramento, CA 95825-5599 Phone: (916) 437-3500 ROSEVILLE 3017 Douglas Blvd. Ste. 300 Roseville, CA 95661 Phone: (916) 437-3500