Previous | Read this before cashing out your retirement account due to COVID-19 Next | How to safely use digital banking
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
How to safely use digital banking
How to safely use digital banking

How to safely use digital banking

October 03, 2024 / Ray Wills

It’s never too early to save for the holidays
It’s never too early to save for the holidays

It’s never too early to save for the holidays

September 26, 2024 / Pheonix Gilbert

How to set SMART financial goals
How to set SMART financial goals

How to set SMART financial goals

September 19, 2024 / Pheonix Gilbert

Why it’s important to invest financially early in your career
Why it’s important to invest financially early in your career

Why it’s important to invest financially early in your career

September 05, 2024 / Warren Hurt

Is it a good idea to pay off my mortgage early?
Is it a good idea to pay off my mortgage early?

Is it a good idea to pay off my mortgage early?

August 22, 2024 / Erin Sunday

How to save on back-to-school shopping
How to save on back-to-school shopping

How to save on back-to-school shopping

August 15, 2024 / Megan Brindle

Avoiding the pitfalls of debt and overusing credit
Avoiding the pitfalls of debt and overusing credit

Avoiding the pitfalls of debt and overusing credit

August 08, 2024 / Dave Winters

Teaching children to save money
Teaching children to save money

Teaching children to save money

July 24, 2024 / Mary Kate Mumper

What to consider when weighing a job offer
What to consider when weighing a job offer

What to consider when weighing a job offer

July 17, 2024 / Levi Crouse

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.