Maybe the most interesting fact in our example is that despite the cumulative losses in equity markets for the last eight years, GRATs were still successful in removing more than $4.2 million from the taxpayer's estate during that period. (Remember, there were times in which the stock market did well over a two-year period during these past eight years.) In fact, two-year rolling GRATs would have successfully removed at least $3.5 million of assets-or more than 35% of the assets you started with-from the grantor's estate even during the worst five-year period (2000-2005) since the statute was enacted in 1990.
These benefits are actually understated, since at the end of the GRAT term assets can be successfully passed to a trust for beneficiaries that is "defective" for income tax purposes, thereby allowing the grantor to continue to pay income taxes on the earnings of that trust without it being considered a gift. Making the residual trust defective for income-tax purposes also allows you to avoid the complexity of having to file a tax return for the residual trust. And that same residual trust can be used for multiple GRATs (if desired).
Another advantage to the taxpayer/grantor is that assets successfully passing to the residual trust are protected from creditors, including both spouses and beneficiaries' spouses, which is helpful in the event of divorce. In the former case, the assets are no longer included in the marital estate. In the latter case, assets shown to be received as a gift or inherited and segregated are generally not considered to be a marital asset-even if the beneficiary is the trustee of the residual trust.
We believe too much attention has been paid to finding the perfect discountable asset (an activity that is complex and expensive for the client) and the result has been lost opportunities to remove assets from taxable estates. We believe that any taxpayer who has a taxable estate-at this point more than $3.5 million per taxpayer or $7 million per married couple-and has at least $1 million of marketable equity securities should be considering rolling two-year GRATs.