Private letter rulings also suggest that a client may structure the note so that the grantor trust pays interest only during the term, and then makes a balloon payment of principal at the end of the term. Structuring the note in this way allows the assets more time to grow within the trust before the trust must repay the principal back to the grantor, and demonstrates one way a sale can produce better results than a GRAT: While the annuity payments under a GRAT can be back-loaded, they may not increase year over year by more than 20%.

Perhaps the most significant difference between the GRAT technique and the sale technique is the treatment of the trust assets when the client dies. With GRATs, the client's death during the term will almost certainly result in all the GRAT assets going back into the client's estate. With a sale to a grantor trust, only the value of the note will be included in the estate (the value of the note being the unpaid principal balance plus accrued interest, unless the executor can establish a lower value under certain Treasury regulations). The grantor trust assets will still pass estate-tax-free to the client's chosen beneficiaries.

All of this suggests that, for clients who may not outlive the ten-year minimum term imposed under the proposed legislation (assuming it passes in its current form), a sale to a grantor trust may be more attractive than a GRAT, especially if there is an existing, funded grantor trust that may be used for the sale.    

William A. Lowell is co-chair of the wealth management group at the law firm of Choate, Hall & Stewart LLP in Boston. Kristin T. Abati is a partner in the group. They focus their practice on complex estate and tax planning and trust administration and can be reached at wlowell@
and [email protected].

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