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Concentrated single-stock positions should be the first choice when funding a rolling short-term GRAT strategy to transfer wealth to family.
The IRS has argued that, upon the death of the grantor prior to the completion of the term, either the GRAT corpus is includible in the estate of the grantor under IRC Section 2039 or a portion of it is includible under Section 2036.
However, cash may constitute part or all of a GRAT's annuity payment if the GRAT owns an interest in a passthrough entity that provides funds to help cover the grantor's tax obligations.
Like zeroing out a GRAT (discussed above), CLATs can be structured so that the gift or estate tax on the remainder interest will be small or nonexistent.
As stated previously, a GRUT is less desirable than a GRAT unless the retained interest percentage is less than the AFR and where re-appraisals are practical.
If D dies during the five-year term, the payments are to be made to D's estate for the balance of the GRAT term.
The more the value of the ownership interests increases after the initial contribution, the better the plan works, because lower valuations at the time of the GRAT make it more likely that subsequent value increases will exceed the Sec.
At the end of year one and two, the GRAT makes annuity payments to the grantor of $500,000 (resulting in all of the value contributed) plus the stated rate of return (assume $60,000 per year).
Tax advisers are challenged to find the best way to use gift tax exemptions, and a combination of a FLP, GRAT and an ILIT can offer significant leverage.
If a client wishes to undertake an estate freeze transaction before guidance is obtained on discount factors for preferred stock, practitioners should consider recommending use of a GRAT or GRUT to hold the common stock.
The GRAT is also now entering into a 10b5-1 plan to exercise some of those stock options and sell those shares.
A gift tax obligation may occur when a GRAT is created, for the amount of the "residual assets" that will pass to the beneficiaries.