A low interest rate is key to making a GRAT work, and it has never been this low. An Internal Revenue Service rate known as the 7520 rate (for the section of the tax code where it appears) is used. The 7520 rate for December is 1.83%, an historic low. After starting the year at 3%, it rose to 3.4% in May, and has inched steadily downward each month since.
Stocks, real estate or other assets go into the trust, and if their value appreciates over the rate, it goes to the recipient tax free. Appreciating over the rate is known as "beating the hurdle."
Gift tax is paid upfront on what is known as the present value of the remainder of the trust, using an IRS interest rate. But, most GRATS are set up so that no gift tax will be owed. This is done by setting the present value of the remainder to zero, a practice known as "zeroing out" the GRAT.
Most GRATs are set up for two-, three- or five-year terms. The longer the GRAT runs, the bigger the chance the grantor could die while it was still in force, in which case the tax benefits are lost.
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