There is a lot to take into consideration when you are planning your estate as a person who has accumulated a significant store of wealth. The estate tax looms large, and under the right circumstances a grantor retained annuity trust (GRAT) can provide tax efficiency.
To determine whether or not you have estate tax exposure you must compare the overall value of your assets to the estate tax exclusion amount. As of this writing in 2013 the exclusion stands at $5.25 million.
There is a base of $5 million that was put into place for 2011, and it is updated annually for inflation. As a result you may see a relatively modest increase in the exclusion amount each year.
Those who are exposed could convey assets into a GRAT and name a beneficiary. Interest accrual is accounted for by the IRS using the Section 7520 rate. To implement this tax efficiency strategy you want to “zero out” the GRAT by taking annuity payments equal to the entire taxable value of the assets that have been conveyed into the trust incrementally over the course of the term.
If things go well you won’t actually be taking everything. The taxable value of the trust is what you’re taking. If the assets outperform the Section 7520 rate that was applied initially there will be a remainder. This remainder will belong to your beneficiary, and no further transfer taxes will be levied.
This is being written in July of 2013 when the Section 7520 rate is 1.4%. It is not hard to imagine a scenario where assets that you conveyed into a GRAT would yield a return that exceeds this rate.