GRATs – Save Taxes Like the Wealthiest Americans

Recently, Bloomberg reported that an “Accidental” Tax Break has been used by the wealthiest Americans to save $100 Billion on estate taxes.  The article and associated video mock the use of the grantor retained annuity trust, or GRAT, by the likes of Sheldon Adelson, Mark Zuckerburg, and Ralph Lauren.

While your company might not be as large as Sands Corp (LVS), Facebook (FB), or Ralph Lauren (RL), you might be able to take advantage of this technique for your own estate planning efforts.

A GRAT is an irrevocable trust into which you can put assets, including the cash, equity, or the shares of a privately held business.  The trust survives for a set period of time, during which the grantor (you) receive an annuity from the assets you placed in the trust.  At the end of the trust’s life, the assets in the trust pass to the beneficiary.

One of the reasons that this tool works for owners of middle market businesses is that when planned well, a potentially significant increase in the company’s value can be passed on to beneficiaries free from gift and estate taxes.  For example, a business owner can put company stock into a GRAT prior to an expected large increase in the company’s value (for example, prior to a sale or IPO).  Then, at the end of the term of the trust, the increase in the company’s value passes to beneficiaries free of taxes.

Using GRATs takes planning, but Sheldon Adelson has found a way to use this tool over 30 times.  Surely, you can plan to use it once.

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