Graduated GRATS

One traditional estate planning technique that has become increasingly popular in recent months is the Grantor Retained Annuity Trust (GRAT). Simply stated, a GRAT is an irrevocable trust where the grantor contributes property to the GRAT and retains the right to receive a percentage of the assets back over a designated period of years; any property remaining in the GRAT at the end of the designated term passes to the remainder beneficiaries of the GRAT. The percentage selected is often tied to actuarial calculations to approximately equal the value of the grantor's original contribution to the GRAT. For gift tax purposes, the actuarial value received back is deducted from the value of the property originally contributed to the GRAT, often resulting in a nominal taxable gift to the remainder beneficiaries. This can be an effective transfer tax technique for a donor who has already used his or her lifetime gift tax exemption amount.