Let’s look at the details.
Estate Tax Parameters
To determine whether or not you have to be concerned about estate tax exposure, you should inventory your assets so that you know where you stand. You can then compare the value of your estate to the amount of the federal estate tax credit or exclusion.
The exclusion is the amount that you can pass along to people before the estate tax would kick in. The estate tax is not applicable on transfers to your spouse, so the exclusion would be the amount that you can transfer to others tax-free.
In 2015, the federal estate tax exclusion is $5.43 million, and the maximum rate of the tax is 40 percent.
There is also a federal gift tax that is unified with the estate tax. The same top rate applies, and the exclusion is a unified exclusion that encompasses your estate along with taxable gifts that you give while you are living.
Zeroed Out GRAT
The idea is to fund the grantor retained annuity trust with assets that you expect to appreciate considerably over the course of the trust term.
When you create the trust agreement, you name a beneficiary who would receive any remainder that is left in the trust after the expiration of its term.
Because a beneficiary may be assuming ownership of a remainder, the gift tax is potentially applicable. The Internal Revenue Service adds anticipated interest to the taxable value of the trust by using 120 percent of the federal midterm rate. This is often referred to as the hurdle rate.
You accept annuity payments throughout the term of the trust. To zero out the grantor retained annuity trust, you arrange for the sum total of your annuity payments to equal the entire taxable value of the GRAT.
Theoretically, there would be nothing left in the trust after its term expires. However, you intentionally funded the trust with highly volatile assets. If the assets in the trust outperform the hurdle rate that was applied by the Internal Revenue Service, there would in fact be a remainder left in the trust after the expiration of the term.
This remainder would be transferred to the beneficiary completely free of the gift tax.
If you have questions about grantor retained annuity trusts or any other estate planning tool, we would be glad to provide answers.
Our firm offers free consultations to people in the greater Geneseo area, and you can drop us a line through this page to set up an appointment: Geneseo IL Estate Planning Attorneys.
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