The difference between the GRAT and the Jackie O. trust is that the GRAT pays an annuity back to the person who set up the trust, rather than to a charity.
The trusts were set up to last for two years, and to pay out $217 million in stock and cash to Audrey Walton. If the stock rose in value so that money was left over at the end, it would go to her daughters tax free.
Coin Toss
Here’s the catch: Walton claimed she owed no gift tax when she set up the trusts, because, under the IRS’s valuation formula, nothing would remain for her daughters. She claimed, in essence, she was just shifting money out of one pocket and into another, with no tax consequences.
The result is a bet with the IRS that anyone would take -- one that tax planners sometimes describe as a “heads I win, tails we tie.”
Audrey Walton’s bet turned out to be a tie because nothing was left over for her daughters. She declined to comment on the case.
Still, recognizing the potential loophole, the IRS attacked Walton’s trust, demanding a gift tax payment. Walton fought back, and in 2000 the U.S. Tax Court declared the Walton move legitimate and forced the IRS to rewrite federal regulations to allow it.
The “Walton GRAT,” as it’s now known, has become a common estate-planning technique for people with large amounts of liquid assets, such as CEO’s of publicly traded companies. The current low interest rates make it all the more likely that a GRAT bet will be a win rather than a tie. Users of GRATs, according to SEC filings, include the Coors brewing family and billionaire Nike Inc. founder Philip H. Knight.
Dead Proposals
President Obama has repeatedly called for closing the Walton loophole in his annual budget proposal, estimating it would save $3.9 billion over 10 years. So far, the proposals have gotten no traction.