Estate planning contains many complicated instruments and arrangements used to keep the wealth you have accumulated over a lifetime of work within your family or to ensure it is used according to your wishes. A grantor retained annuity trust is one such instrument that, when put into practice can drastically reduce your estate’s tax liability upon your passing and transfer as much of the remaining assets as possible to those you love rather than the Federal Government. It also has benefits for the person who creates the trust in the form of annuity payments. If you have begun considering whether you might want to set up a grantor retained annuity trust, the expert estate planning attorneys at Battaglia, Ross, Dicus and McQuaid, P.A. are here to guide you with a consultation.
What is a Grantor Retained Annuity Trust?
A grantor retained annuity trust is one type of trust structure that allows the settlor, or the person who sets up the trust, to be granted an annuity payment each year on the assets that are placed in the trust. This trust is set up to exist for a specified number of years and when the termination date arrives, any assets remaining in the trust are then distributed to the grantor retained annuity trust’s specified beneficiaries.
However, what is unique about a grantor retained annuity trust is that there is a more complex calculation involved on the part of the settlor regarding potential advantages and drawbacks. Part of the structure of a grantor retained annuity trust deals with section 7520 of the Internal Revenue Service code on interest rates. These particular interest rates in the code are “used to value certain charitable interests in trusts.” What that means for a grantor retained annuity trust is that the amount of the yearly annuity payment that the settlor receives during the trust’s term is determined pursuant to these rates. There are a few options to ponder in this situation.
First, initiating a grantor retained annuity trust is advisable if you believe the assets you wish to place into the trust will appreciate much more than the stated 7520 interest rate. If you are relatively certain that will be the case, it means you will continue to receive the annuity payments for the life of the trust and when the trust expires, the remaining assets will be transferred to your family or named beneficiaries. It is also possible for the settlor to initiate a grantor retained annuity trust whose annuity payments are pegged to the 7520 interest rate. In this case, the funds or assets that were originally transferred into the trust will eventually be transferred back to the settlor as annuity payments.
How Long Does a Grantor Retained Annuity Trust Last?
Since the majority of our clients inquiring about a grantor retained annuity trust are seeking to save on taxes and receive annuity payments while making a bet that their assets will appreciate dramatically, many of them choose the shortest possible lifespan of two years. Although, many individuals choose lengthier options of around 5 to 10 years. In the end, it’s all up to you and your personal preference. Our estate planning attorneys are ready and willing to assist you with all the information you need to make the best decision for your circumstances.
What Other Considerations Should I Take into Account?
At Battaglia, Ross, Dicus and McQuaid, P.A. we are always saddened to hear about the passing of one of our dear clients, but when setting up a grantor retained annuity trust, this is something you should take into account. If, for some reason, you happen to die during the trust’s specified lifespan, any assets you placed into the trust would then belong to your estate once again, which means they would be subject to estate taxes. On the bright side, the state of Florida does not have state-level estate taxes, so your assets would only be taxed at the federal level.
Obviously, there is the possibility that the assets you decide to move into your grantor retained annuity trust don’t appreciate faster than the 7520 interest rate. You will need to carefully contemplate whether you believe the Federal Reserve is liable to raise interest rates in the future as this could negatively impact the valuation of your assets. If interest rates do happen to rise, it could mean that the assets eventually return to you at the end of the trust’s term at their lower valuation leaving you out of pocket for the money spent to set up the trust.
What is the Best-case Scenario for a Grantor Retained Annuity Trust?
For the most part, a grantor retained annuity trust is most beneficial to high net worth individuals or people who possess assets that are practically guaranteed to increase in value faster than the 7520 interest rate. For example, a grantor retained annuity trust can be used to transfer assets almost tax-free to your children. If you have an asset worth millions of dollars, such as rare art, and you expect that asset to grow to a few million more over the next few years, a grantor retained annuity trusts could allow you to transfer that appreciation to your heirs at the expiration of the trust without capital gains taxes.
Additionally, if you are the holder of a large amount of stock in a company about to go public, a grantor retained annuity trust would be a great way to pass on money to your heirs as well. It is quite often the case that the stock price in companies doubles from their pre-IPO valuations and obviously this would be a much higher appreciation than the 7520 interest rate.
Hire an Expert Estate Planning Attorney for Your Grantor Retained Annuity Trust Today!
The estate planning attorneys at Battaglia, Ross, Dicus and McQuaid, P.A. are experts in Florida estate planning law with decades of combined experience and a litany of satisfied clients to prove it. If you’re thinking of placing your valuable assets into a grantor retained annuity trust, our attorneys will be happy to consult with you and talk through your options in amazing detail assisting you with making the most informed decision possible. Your estate, hard work, family and legacy are not things to be taken lightly. Let us help you form a legacy the conforms to your wishes. Call us for a consultation today!
