Previous | Read this before cashing out your retirement account due to COVID-19 Next | Mortgage tips for first time home buyers
August 17, 2020 / The Merrill Anderson Company
A GRAT in action

A GRAT in action

The Grantor-Retained Annuity Trust (GRAT) has emerged as a popular strategy in the estate planner’s toolkit. The idea is that a grantor places assets in a trust while retaining the right to receive payments from the trust. When the term of the trust expires, any assets remaining in the trust pass to a beneficiary, typically a family member.

Here’s an example of a GRAT that, unfortunately, failed. On February 1, 1998, Patricia Yoder created a Grantor-Retained Annuity Trust, keeping for herself a fixed annuity for 15 years. The annuity was set at 12.5 percent of the trust’s initial value. The trust was funded with investment real estate, and the annuity came to $302,259 per year. Although the value of the trust’s income varied from year to year, the annuity payments to Patricia did not change, and they were timely paid.
man holding money next to shield with lock icon
Patricia died November 2, 2012, three months shy of the expiration of the GRAT’s term. Her estate tax return reported a total taxable value of $36.8 million, including the value of the GRAT. Some $11.1 million in estate taxes were paid. Someone then had second thoughts and believed that including the GRAT in the taxable estate was a mistake. A refund of $3.8 million was sought, and when the IRS did not respond, the matter went to District Court.

The estate argued that a fixed annuity is not a “right to income” within the meaning of the tax code section that covers this area. An annuity is the right to receive payments from transferred property, regardless of the income earned by the property. The Court acknowledged that there is no case directly on point, but using a substance-over-form reasoning held that the estate tax does apply in this situation. The U.S. Supreme Court has held that the grantor's reservation of any interest, however remote, was sufficient to bring the conveyance within the code's "possession or enjoyment" language of the tax code.

With that much money at stake, an appeal was filed with the Ninth Circuit Court of Appeals. That Court has now affirmed the District Court decision.

Had Patricia chosen a 14-year trust term, or if she had lived just three more months, the $3.8 million tax would have been avoided.

(June 2020)
© 2020 M.A. Co. All rights reserved.

Recent Articles
Mortgage tips for first time home buyers
Mortgage tips for first time home buyers

Mortgage tips for first time home buyers

January 25, 2023 / David Kuhns

Charitable Giving; A donor-advised fund offers tax benefits
Charitable Giving; A donor-advised fund offers tax benefits

Charitable Giving; A donor-advised fund offers tax benefits

January 20, 2023 / The Merrill Anderson Company

Why entrepreneurs find it hard to ask for help
Why entrepreneurs find it hard to ask for help

Why entrepreneurs find it hard to ask for help

January 16, 2023 / Patti Murray

Why the IRS is still catching up
Why the IRS is still catching up

Why the IRS is still catching up

January 06, 2023 / The Merrill Anderson Company

Lease vs Buy: Which is Better for My Business?
Lease vs Buy: Which is Better for My Business?

Lease vs Buy: Which is Better for My Business?

December 22, 2022 / Jeramy Culler

Stabilizing Your Business' Cash Flow
Stabilizing Your Business' Cash Flow

Stabilizing Your Business' Cash Flow

December 15, 2022 / Jeramy Culler

Social Security COLA Increase is Biggest Since 1981
Social Security COLA Increase is Biggest Since 1981

Social Security COLA Increase is Biggest Since 1981

December 08, 2022 / The Merrill Anderson Company

How to Protect Yourself After a Data Breach
How to Protect Yourself After a Data Breach

How to Protect Yourself After a Data Breach

December 01, 2022 / Ray Wills

Protecting Your Business Debit Card
Protecting Your Business Debit Card

Protecting Your Business Debit Card

November 24, 2022 / Ray Wills

Join our e-newsletter

Sign up for our e-newsletter to get new content each month.

NOTICE: YOU ARE LEAVING F&M TRUST!

You are now leaving the F&M Trust website. Links to third-party sites are provided for your convenience. Such sites are not within our control and may not follow the same privacy, security or accessibility standards as ours. F&M Trust neither endorses nor guarantees offerings of the third-party providers, nor is F&M Trust responsible for the security, content or availability of third-party sites, their partners or advertisers.