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Rolling GRATs is a technique that involves creating a series of consecutive short term maximum annuity GRATs to minimize the risk of mortality during the length of the analysis. For this model, its assumed that each GRAT created (after the first), is funded from the annuity payouts of the existing GRATs that have not matured. For example, in year 3, the GRAT created is funded by the last payout of the initial GRAT and the first payout of the 2nd GRAT.
The shortest term allowed by regulations is 2 years, and it is assumed that each GRAT created is a 2 year maximum annuity GRAT (which yields a taxable gift under $1). The short term can take advantage of asset volatility. If the growth and income rate surpass the §7520 rate within the trust term, the excess is removed from the taxable estate and given to the beneficiaries. If the growth and income rate do not surpass the §7520 rate, the strategy is ineffective because the entire asset value would be included in the owner’s estate.
Since the amount gifted to each rolling GRAT is assumed to be a zeroed out GRAT, this will have no impact on the owner’s federal estate tax exclusion.
Entering Data
- Transfer Date – Enter the month and year.
- §7520 Rate The program automatically enters the correct §7520 discount rate if you have kept the AFR Rates Manager up-to-date. If the AFR Rates Manager is not up-to-date, the program shows a 30% value for the selected transfer date. The program automatically rounds the rate to the nearest 2/10 of 1% as required under §7520.
- Principal Enter the gift tax value of contributed principal after appropriate discounts, such as minority interests or lack of marketability. The program uses this value to calculate the annuity payout, the present value of the annuity payments, and the present value of the remainder for gift tax purposes.
- Payment Timing Select Begin or End to indicate when the payment should be made for the selected payment period. A Begin case is assumed to be the same as an End case with an additional payment made at the beginning of the period.
- Trust Income Earned Enter the income earned by the trust. Enter a positive value. It is only used for the Economic Schedule, and it is applied to the Pre-discounted Fair Market Value, not the Discounted Fair Market Value. This need not be entered if you are not interested in that analysis.
- Trust Growth Rate Enter the annual growth of the principal. Use a positive or negative value. It is only used for the Economic Schedule, and it is applied to the Pre-discounted Fair Market Value, not the Discounted Fair Market Value. This need not be entered if you are not interested in that analysis.
- Grantor’ Age This data input field is only used when Life or Shorter is chosen as the Calculation Type. Use a value from 0 to 109 to indicate the age of the person whose life is being used to measure the term of the trust. Enter the age using the birth date which is nearest to the transfer date.
- Death Year You can elect to enter a manual year of projected death, or have the program calculate the year based off the life expectancy of the owner (based on the age you entered)
- Constant Rate (Growth of Annuity Payments) Enter a rate that you wish the annuity payments to grow. Maximum entry is 20%. For optimized results, its suggested that you enter 20%.
Results
Rolling GRAT is a term used to describe a situation where the grantor uses the annuity payout to fund a new GRAT each year. Typically, each GRAT will be a zereo or minimum gift (maximum annuity) GRAT for a two-year duration.
Rolling GRATs are always assumed to be structured as a series of two-year maximum annuity GRATs. This is the only option allowed in this model. In addition, the GRATs will not be illustrated for a period that will cause the last two-year GRAT to terminate after the death of the grantor.
In the first year, the transfer takes place to a 2-year GRAT. In year 2, the payout from the first GRAT is used to create a 2nd GRAT. In year 3, the payout from the first GRAT and the payout from the second GRAT are both used to fund a 3rd GRAT, etc. This is repeated up to the year prior to death.
As a grantor trust, the owner is deemed to own the trust principal for income tax purposes. Therefore, all trust income would be taxable to the grantor. However, there is no capital gain when trust principal is distributed for the annuity payout.
As a grantor trust, the owner is deemed to own the trust principal for income tax purposes. Therefore, all trust income would be taxable to the grantor. However, there is no capital gain when trust principal is distributed for the annuity payout.
Rolling GRATs will only show a positive impact if the growth/income rates sum up to more than the §7520 rate. When this happens, the excess of each 2-year GRAT is given to the beneficiary.
When the owner does not survive the trust period, the GRAT will be included in the estate at death. This is shown as ‘payments going back to the estate.
After year one, there will be two existing GRATs. In each subsequent year, one GRAT will mature and a new GRAT will start. Except for the first and last year (death year), there will always be two active GRATs.
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