Grantor Retained Annuity Trusts, or GRATs, can be particularly effective for passing on wealth when employed over decades, said Steve Antion, an attorney for Winston & Strawn LLP in Los Angeles. He advises clients to stash some of their more volatile existing investments in these structures for short periods, a minimum of 2 years.
At the end of the term, the client gets her money back plus a statutory interest rate—3 percent annually as of April. An heir who is the beneficiary of such a trust gets everything else and doesn’t have to pay taxes on it. A $10 million initial investment that appreciates 25 percent over three years would return $11.02 million in principal and interest to its creator (assuming a stable interest rate). The rest of its gains, some $1.48 million, would be transferred to heirs tax-free.
Once each GRAT expires, Antion advises clients to roll the investment into a new one, and repeat the process. The strategy is “amazingly effective and completely legal,” he said. “If you start early enough and do it long enough, you can move a lot of money without estate tax.”
But even in the best of circumstances, balancing tax benefits with maintaining control of your assets is tricky. Those who pass on their wealth or business too early can find themselves on the sidelines sooner than they’d wanted. Still, doing so early and quietly might just avoid the kind of mess Tom Benson found himself in. Careful planning won’t cure all family drama, but it just might keep it out of the headlines.
This article was provided by Bloomberg News.