What Is a Grantor Retained Annuity Trust in New York? www.myestateplan.com 1

“To understand the value of a grantor retained annuity trust (GRAT), you need to absorb some background

information about federal transfer taxes.”

WHAT IS A GRANTOR

RETAINED ANNUITY

TRUST IN NEW YORK?

MARK S. EGHRARI NEW YORK ESTATE PLANNING ATTORNEY

What Is a Grantor Retained Annuity Trust in New York? www.myestateplan.com 2

To understand the value of a grantor retained annuity trust (GRAT), you need to

absorb some background information about federal transfer taxes. We will start

there, and then we will move on to the strategy that is called "zeroing out" a

grantor retained annuity trust.

TRANSFER TAXES

There is a federal estate tax that you must contend with if you have been able to

accumulate a significant store of wealth. Everyone does not pay the tax, because

there is a relatively high credit or exclusion. In 2015, the amount of this exclusion

is $5.43 million.

If you are transferring more than $5.43 million, the estate tax is a factor for you.

What Is a Grantor Retained Annuity Trust in New York? www.myestateplan.com 3

The tax looms large, because it carries a maximum rate of 40 percent.

Before we continue, we should touch upon the unlimited marital deduction. You

would be using this $5.43

million exclusion to leave

assets tax-free to people

other than your spouse.

Because of the unlimited

marital deduction, you can

transfer unlimited property

to your spouse free of

taxation, as long as your

spouse is an American

citizen.

In addition to the federal estate tax, there is also a federal gift tax. This tax exists

so that you cannot give gifts while you are living to avoid the estate tax.

The gift tax is unified with the estate tax, so the $5.43 million exclusion that we

have in 2015 is a unified exclusion. It applies to lifetime gift giving along with the

estate that you are passing along to your heirs.

This tax also carries a 40 percent maximum rate.

What Is a Grantor Retained Annuity Trust in New York? www.myestateplan.com 4

GRANTOR RETAINED ANNUITY TRUSTS Now that we have set the stage, we can look at grantor retained annuity trusts. To

implement this strategy, you intentionally fund the trust with assets that you

would expect to

appreciate considerably

over the coming years.

When you fund the trust,

you are removing those

assets from your estate

for estate tax purposes.

You name a beneficiary

who would inherit

anything that may

remain in the trust after

its term expires. If something does remain in the trust after the term expires, the

transfer would be subject to the gift tax.

What is the benefit if the gift tax is going to be applicable? The answer is that you

endeavor to zero out the grantor retained annuity trust. You take annuity

payments throughout the term of the trust that are equal to its entire taxable

value as it is defined by the IRS.

The IRS calculates this value by adding 120 percent of the federal midterm rate to

account for anticipated appreciation. This is often referred to as the hurdle rate.

If the estimate that was applied by the IRS was accurate, there would be nothing

What Is a Grantor Retained Annuity Trust in New York? www.myestateplan.com 5

left in the trust after its term expires. It would be "zeroed out."

However, interest rates have been low for a number of years now. If the assets

that you conveyed into the trust perform better than the hurdle rate, there will in

fact be something left after the expiration of the term. When the beneficiary

assumes ownership of the remainder, the gift tax would not be applicable.

This strategy can be effective if you are in possession of appreciable assets while

the interest rates are relatively low.

What Is a Grantor Retained Annuity Trust in New York? www.myestateplan.com 6

SUMMARY

Federal transfer taxes can take a toll if you are a high net worth individual. There

is a federal estate tax, and there is also a federal gift tax. These two taxes are

unified under the tax code, and the unified lifetime exclusion is $5.43 million.

Asset transfers to anyone other than your spouse are potentially subject to this

tax if the transfers exceed the amount of the exclusion.

If you are exposed to federal transfer taxes, you must take steps to gain tax

What Is a Grantor Retained Annuity Trust in New York? www.myestateplan.com 7

efficiency. One strategy that you may be able to take advantage of is the zeroed

out GRAT strategy.

This is just one possibility. There are various different ways that you can mitigate

your estate tax exposure, and the best combination will vary depending upon the

circumstances.

To explore all of your options, set up a consultation with a licensed estate

planning attorney.

REFERENCES

Internal Revenue Service http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Estate-and-Gift-Taxes Forbes http://www.forbes.com/sites/robclarfeld/2012/02/17/estate-and-gift-tax-considerations-for-2012-grats-and-you-must-act-now-3/

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About the Author

Mark S. Eghrari

Mark S. Eghrari is an attorney in private practice in Smithtown, New

York. He has been in practice since 1988. Mark S. Eghrari provides

extensive estate and tax planning services to individuals and

businesses. Mr. Eghrari’s primary focus is helping clients avoid

probate, minimize or eliminate Federal and State Estate taxes and

protect their assets from the high cost of nursing care, if they become

ill. Mr. Eghrari’s expertise is in providing unique and innovative

estate planning solutions that create a secure future for his clients and their loved ones. Mr.

Eghrari is a member of the American Bar Association and New York State Bar Association as

well as the National Academy of Elder Law Attorneys and the American Academy of Estate

Planning Attorneys.

Mr. Eghrari completed his undergraduate work at Lafayette College in Easton, Pennsylvania

and received his MBA in banking and finance from Hofstra University on Long Island. He

earned his Juris Doctorate from the Hofstra University School of Law, where he was a member

of the Law Review. While in law school, Mr. Eghrari gained practical experience in the

corporate tax department of Citicorp in New York city.

Mark S. Eghrari and Associates PLLC www.myestateplan.com 50 Karl Avenue, Suite 202 Smithtown, NY 11787 Phone: (631) 265-0599 Fax: (631) 265-0754