One of the most important estate planning considerations for high net worth individuals is the potential impact of the federal estate tax. The tax carries a top rate of 40 percent, so we are talking about a very significant bite.
At the current time, the estate tax credit or exclusion stands at $5.34 million. Anything that you want to transfer that exceeds this amount is potentially subject to taxation.
Those who are exposed to the estate tax must take steps to gain estate tax efficiency. There are a number of strategies that can be implemented effectively. One of them is the “zeroed out” grantor retained annuity trust strategy.
Let’s look at the details.
Highly Volatile Assets
When you fund a grantor retained annuity trust, you are removing those assets from your estate for estate tax purposes. However, you name a beneficiary when you create the trust. The beneficiary would assume ownership of any remainder that is left in the trust after its term expires.
Because a beneficiary may be receiving a gift, the federal gift tax is applicable. The gift tax is unified with the estate tax. The $5.34 million exclusion applies to gifts that you give while you are living along with the value of your estate.
The assets that have been conveyed into the trust may appreciate during the term of the trust. When the IRS is valuing the trust for gift tax purposes, anticipated appreciation is added using 120 percent of the federal midterm rate.
To implement this strategy you want to zero out the grantor retained annuity trust. To accomplish this aim, you take annuity payments that will equal the entire taxable value of the trust. Theoretically, there would be nothing left after the trust term expires.
When you fund the trust, you should use highly volatile assets. You want the assets that have been conveyed into the trust to outperform the federal midterm rate that was applied by the IRS to account for anticipated growth.
If the growth does exceed the estimated interest that was applied by the Internal Revenue Service, there will in fact be something left in the trust after its term expires. The beneficiary that you named in the trust agreement would assume ownership of this remainder, and there would be no gift tax consequences. The transfer would take place in a completely tax-free manner.
Explore Wealth Preservation Strategies
Implementation of the zeroed out grantor retained annuity trust strategy can be part of a well constructed wealth preservation plan. If you would like to learn more about these trusts and other options that may be available to you, we can help.
Our firm offers free consultations to people in the Quad Cities area. To set up an appointment, send us a message through our contact page.