GRAT Allows Wealthy Americans to Avoid Estate Tax

 Posted on December 26, 2013 in Taxation Law

A trust that is specifically designed to take advantage of a federal tax loophole created in 1990, is helping many billionaire families avoid paying taxes, and in a perfectly legal manner. The trust is called the Grantor Retained Annuity Trust, or GRAT, and it is helping many wealthy billionaires to avoid paying taxes legally. In fact, according to a recent piece that was published in Bloomberg Politics, some of the richest Americans have been able to avoid taxes to the tune of $100 billion merely using GRAT.

How it works is like this. Under the current tax laws, individuals and couples who are worth more than $ 5.25 million, and individuals and couples who are worth more than $10.5 million, will have the federal estate tax applied to them. However, when it comes to inheritance, the value of the estates above these exemptions are liable to be taxed a gift tax at the rate of 40%. If families want to pass on their assets to their children during their lifetimes, they are only allowed to give a maximum of $ 28,000 a year to one person without having the gift tax levied on them.

Many families are working around this by creating a Grantor Retained Annuity Trust. Legally, the trust allows the person to make a gift to himself, and use the trust to hold the asset for a period of time with a minimum holding period of two years. At the end of the period of time, the trust will return the original value of the assets that have been parked in it, in addition to a certain amount of interest. However, if the asset gains value during the time that it is in the trust, any excess gains that are greater than the interest that can be applied will be passed on to a beneficiary. Those excess gains are tax-free.

Several billionaires including Facebook's Mark Zuckerberg, Goldman Sachs executives, and fashion designers have used GRAT to avoid paying estate taxes.