10-Year Minimum GRATs Added to COBRA Legislation

Posted By: Manish C. Bhatia

With the Federal estate tax legislation stalled, Senator Robert Casey (D-PA) has added a provision to the “Extend COBRA Premium Assistance Program Act of 2010” to require a minimum 10-year term for Grantor Retained Annuity Trusts (GRATs).  The bill was referred to the Committee on Finance on June 29, 2010.

A GRAT is an advanced planning method which consists of the Grantor making a gift of assets likely to grow to the GRAT.  The Grantor is then paid an annuity from the income and/or principal of the GRAT, with the balance passing to the beneficiaries of the GRAT at the end of the term.  The keys to a successful GRAT are that (a) the assets grow beyond the applicable rate provided by the IRS and (b) the Grantor survives the term of the GRAT.  If the Grantor does not survive the term, then the assets of the GRAT are included in the Grantor’s estate.

GRATs have been targeted by the Obama Administration since May 2009, when a 10-year minimum term was proposed in the 2010 fiscal-year budget.  By imposing a 10-year minimum term, the use of GRATs in estate planning will be significantly diminished, reducing the appeal of late-life GRATs and eliminating the availability of “Rolling GRATs.”3

3 – “Rolling GRATs” are a series of short term (2-3 year term) GRATs used instead of long-term GRATs to increase the likelihood that the Grantor will outlive the GRAT and benefit from the transfer of wealth out of his or her estate.