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An excerpt from Your Multimillion-Dollar Exit: The Entrepreneur’s Business Success(ion) Planner.

A grantor retained annuity trust (GRAT) is an estate planning technique permitted under IRS regulations. This technique allows you, the grantor, to make a gift to a trust over which you may serve as the trustee and receive an annuity payment from the trust for a specified period. Any appreciation on the trust property at the end of the trust term passes to your heirs, estate and gift tax free.

Additionally, if the fair market value of the assets transferred to the trust equals the present value of the annuity payable to you over the term of the trust, you can zero out the gift, meaning that you owe no gift tax on the transfer to the trust. This is known as a zeroed-out GRAT and was allowed by the U.S. Tax Court in a case where the Walmart founder’s sister-in-law attempted to make a zeroed-out GRAT gift and the IRS tried to disallow it. The Tax Court overruled the IRS, and since that case, the IRS has allowed taxpayers to use properly structured, zeroed-out GRATs.

You can use rolling GRATs to continuously move the annuity payments and the appreciation on those annuity payments out of your estate. In other words, you set up a new GRAT into which you deposit the annuity payments received from the first GRAT, and any appreciation on those deposits further escapes gift and estate taxes.

The GRAT technique (along with most of the advanced planning techniques described in this section) has survived various legislative attacks over the last several decades. Most recently, in September 2021, the House Ways and Means Committee passed legislation that would have prohibited GRATs from being viable planning techniques unless they were at least ten years in length and certain other requirements were met. Zeroed-out GRATs would have been disallowed (i.e., some portion of the gift would be subject to gift tax).

In November 2021, the House of Representatives passed tax legislation without including the Ways and Means GRAT proposals, and the Senate failed to pass any tax legislation. Tax legislation passed in 2022 under the budget reconciliation rules excluded any estate, gift, or GST tax changes. As of the date of this publication, Congress has not passed legislation curtailing or limiting GRATs or any of the other advanced planning techniques, and, thankfully for you and my other entrepreneur clients, these estate planning techniques continue for now.

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