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| Best Practices |
Perfect Timing
Melissa Phipps
06/01/2004
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Early this year, Joanne Johnson, a wealth advisor with JPMorgan in New York,
was visited by a 45-year-old CEO and majority owner of a closely held business
in a high-growth industry. His request: to begin passing some of his wealth to
his three young children. Johnson was elated, because the client’s timing could
not have been better. His company had been growing steadily over the past few
years and was primed to be acquired by a larger competitor.
TOP VIEW
Much touted these days by estate planners, a GRAT is an irrevocable trust set up
to transfer wealth during a grantor’s lifetime. When our assets are transferred
into this trust, their value is frozen for estate-tax purposes. |
Her solution was
a strategy called a grantor retained annuity trust, or GRAT. This would
prove an ideal way for the CEO to transfer part of the future growth of his
business to his children at a discounted valuation without triggering hefty gift
or estate taxes. He would, however, retain control of the company and benefit
from its future appreciation. If his business were to explode in value, the
children could receive millions of dollars. If the company failed to grow, the
children would not gain—or lose—anything.
“The last six to 12 months have
been a great time to use GRATs,” extols Johnson. The recent confluence of low
interest rates—which affect the size of a gift that can be made in a GRAT—and a
stock market that is rising but still volatile have afforded GRATs a perfect
springboard. Their benefits were recently augmented when the IRS acknowledged
that GRATs can, in fact, be structured as zero-gift-tax vehicles. With interest
rates still hovering near historic lows, the IRS is making very conservative
assumptions about how much our assets within a GRAT will grow: just 3.8 percent
as of April. If we expect our GRAT-protected assets to grow beyond that over the
next few years, these trusts can become very profitable vehicles.
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