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GRATS - Why The Trump Family’s Estate Plan Has Everyone Talking - By: Moshe B. Genet, Esq.

In case you may have missed it, the New York Times detailed recently how President Donald Trump received at least $413 million in today’s dollars from his father’s real estate empire. According to the NYT, Donald Trump’s parents, Fred and Mary Trump, successfully transferred over $1 billion in wealth to their children, paying only about $52.2 million in taxes, or about 5 percent. This is far less than the 55 percent tax rate then imposed on gifts and inheritances, which would have produced a whopping tax bill of at least $550 million dollars.

Fred and Mary Trump’s plan of giving wealth to their children was structured to sidestep gift and inheritance taxes. One way they were successful was through the use of Grantor Retained Annuity Trusts, or GRAT for short.  According to the NYT, by 1995, Fred and Mary Trump put much of their real estate into GRATs and these assets were eventually distributed to their children. GRATs are a powerful tool to transfer wealth and you certainly do not have to be the President of the United States to benefit from them.

A GRAT is a trust by which the person creating the trust transfers property (stocks, real estate, etc.) to the trust and retains an annuity for a specified term of years.  After the end of the term, the remaining trust property (after all annuity payments have been made) passes to the beneficiaries, which the grantor would designate in the trust agreement.  For gift tax purposes, the gift value would equal the value of the assets transferred less the grantor’s annuity payment for the designated amount of time. In most cases we can utilize a zero gift tax value.  

The primary benefit of the GRAT occurs when the investment return exceeds the interest rate set by the IRS which results in a transfer of the remaining balance to your beneficiaries while escaping transfer taxation.  The current interest rate set by the I.R.S for October 2018 is 3.4%. This interest rate is still relatively low by historical standards and makes the current time a good time to utilize this tool. Assume you place $2 million dollars in a GRAT and set the term period for two years. If the assets produce a 7% return annually, $113,601.55 will remain in the GRAT and transferred free of estate and gift taxes.

Year

Beginning

Balance

7%

Growth

Annual

Payment

Remainder

1

$2,000,000

$140,000

$1,051,303.60

$1,088,696.40

2

$1,088,696.40

$86,008.75

$1,051,303.60

$113,601.55

Summary

$2,000,000

$216,208.75

$2,102,607.20

$113,601.55

Depending on the amount used to fund the GRAT, a substantial amount of money can be transferred to your beneficiaries without incurring a transfer tax.  Also, certain assets that have high potential for growth are prime candidates for placement in GRATs.

Consult with the experienced attorneys of Morris Law Group if you wish to learn more about GRAT’s or believe that is the right planning technique for you. 

Source: Morris Law Group

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