GRATs (grantor retained annuity trusts) can save your clients thousands of dollars in estate taxes. This little known loophole in estate tax law gives its owners the ability to invest money nearly tax free and gain interest while it’s in the trust. What’s more, GRATs can be gifted back to their owners. In the article below, “How billionaires beat the estate tax,” author Mathew Heimer, outlines how billionaires have used GRATs since the 90s and how you can use them to grow and preserve your clients’ wealth.
How billionaires beat the estate tax
By Matthew Heimer
Recent changes in the federal estate tax mean that it snares an ever-shrinking share of the population. But thanks to a loophole that Congress created in 1990, and a trust designed to take advantage of it, some enterprising families are going even further to legally avoid taxation. In a detailed and revelatory piece in Bloomberg Politics this week, Zachary R. Mider explains why the richest Americans have reason to be grateful for the GRAT—to the tune of about $100 billion.
Currently, the federal estate tax affects individuals with estates worth $5.25 million or more and couples with estates upward of $10.5 million. When passed down to heirs, the value of estates above those exemptions gets taxed at 40%. When families pass gifts to the young’uns during their lifetimes, they can only give a maximum of $28,000 a year to any one person without getting hit by the 40% gift tax.
Enter the GRAT, which stands for “grantor retained annuity trust.” The creator of a GRAT is, from a legal standpoint, making a gift to himself: He parks the asset in a trust for a period of time (the minimum is two years) and, at the end of the period the trust returns to him the original value of that asset, plus a nominal amount of interest. But if the asset gains in value while it’s in the trust, excess gains above that interest rate can be passed to a beneficiary tax-free.
GRATs can be a particularly effective way to pass along stocks whose prices have been knocked down – and there are no restrictions on how many you can set up, or how much money you can pass through them. Relying on Securities and Exchange Commission filings, Mider estimates that Sheldon and Miriam Adelson have used GRATs to pass $7.9 billion worth of wealth to their children since 2010–most of it in the form of stock in Las Vegas Sands Corp. LVS +0.37%, which Sheldon Adelson founded in 1988.
Mark Zuckerberg of Facebook FB -0.58%, Lloyd Blankfein of Goldman Sachs GS -0.12% and fashion designer Ralph Lauren RL +0.02% are among the legions of other GRAT users, Mider reports. Mark Covey, the tax attorney who invented the GRAT, estimates that since 2000, when Internal Revenue Service rules that curbed the trusts were overturned by a court ruling, high earners have passed about $100 billion to heirs through GRATs. Mider says that’s “equivalent to about one-third of all estate and gift taxes the U.S. has collected since then,” and he adds that the existence of GRATs have made the estate tax system “essentially voluntary.”
Here’s the kicker: Congress originally created GRATs in 1990 as part of an effort to stamp out a different tax shelter, also invented by Covey. President Obama and some lawmakers have discussed reforming GRATs in recent years, but little is likely to happen on that front any time soon; as a law professor tells Mider, the overlap between GRAT users and major campaign donors is, shall we say, extensive.