It is necessary to learn about the federal estate tax to grasp the concept of a GRAT and the circumstances under which it can be helpful. Because of its high maximum rate of 40 percent, this levy can devastate your legacy.
A federal estate tax credit or exclusion permits the transfer of an amount before the levy is triggered upon the decedent’s death. As of this writing in 2020, it has risen to $11.58 million. When the next year arrives, the number will likely have increased somewhat to reflect the yearly inflation trend.
Because of the unlimited marital deduction, property transfers to a spouse are not subject to estate tax. The marital exemption only applies if your partner is a citizen of the United States.
If you are married to a foreign national, you can use a qualified domestic trust to avoid this problem, but we will discuss this tool in more depth later.
The estate tax exclusion for spouses has been transferable since 2011.
The word “portability” is used here to mean that a surviving spouse can claim the exclusion that belonged to the deceased spouse. With the current rules in force, survivors can exclude $23.16 million from their taxable income.
Since the inheritance tax was implemented in 1916, gifting has become a popular strategy for avoiding it. However, since 1932 there has been a federal gift tax, and this loophole has been addressed. Both lifetime contributions and the value of your estate are exempt from the $11.58 million credit.
Zeroed-Out GRAT
Those subject to the estate tax must ensure that their assets are transferred in the most tax-effective way possible. The grantor-retained annuity trust (GRAT) method with a zero balance might be used for this purpose.
The trust can then be funded and a beneficiary designated.
For a certain amount of time, you will receive regular payments from the trust in the form of an annuity. The Internal Revenue Service calculates anticipated interest at the rate specified in Section 7520, which stands at.6 percent as of this writing.
By taking payments that add up to the total value of the grantor-retained annuity trust, including any future appreciation, this technique “zeroes out” the faith.
If the trust is indeed worthless, then the recipient would get nothing.
There will be a residual in the trust, and it might be pretty sizeable if the assets transferred into it beat the 7520 rates. The grantor-retained annuity trust is a powerful estate tax efficiency instrument since any surplus is passed on to the recipient tax-free.
