New 10-Year Minimum Requirement for Grantor Retained Annuity Trusts

Posted by Keith Codron | Apr 05, 2010 | 0 Comments

On March 24, 2010, by a vote of 246-178, the U.S. House of Representatives passed H.R. 4849, the Small Business and Infrastructure Jobs Tax Act of 2010.  All Republicans voted against this bill, the stated purpose of which is to provide tax relief and infrastructure incentives to small businesses. As with most government assistance programs, this bill will cost a lot of money. In order to help offset that cost, the bill contains a seemingly innocuous and easily overlooked revenue raising provision aimed squarely at limiting the tax benefits of grantor retained annuity trusts ("GRATs"). These irrevocable term-certain trusts are one of the favorite transfer tax reduction tools used by advanced estate planners, particularly those attorneys servicing the needs of high net worth business owners, key executives, professional practitioners and investors.

If the bill becomes law the following new restrictions will be added to Section 2702 of the Tax Code, effective as of the date of enactment of the legislation: (1) GRATs will be required to have a minimum term of ten years; and (2) annuity payments from a GRAT will not be permitted to decrease during the first ten years of the trust.  As with any GRAT, failure to outlive the term may cause the trust's assets to be includible in the grantor's taxable estate, thereby defeating the transfer tax reduction objective in creating the GRAT. Under current tax law there is no minimum required term for a GRAT; in general, the older the grantor the shorter the term selected for the GRAT.

Final passage of this legislation would effectively eliminate GRATs as a viable estate planning strategy for older age clients who may not outlive the required minimum term of 10 years.  Furthermore, for older age clients this legislation would limit the use of a GRAT as a roll-out strategy for life insurance financing techniques, such as premium financing or split-dollar arrangements.

Assuming the bill becomes law, clients may have a very limited timeframe in which to implement shorter-term GRATs so as to reduce their federal transfer tax bite.

For additional information please contact the blog writer, Keith Codron, toll-free, at (800) 497-0864, or email him at [email protected].

About the Author

Keith Codron

Keith Codron is an Orange County attorney with more than 40 years of experience in the field of trusts and estates. He has been certified as a specialist in estate planning, trust and probate law by the Board of Legal Specialization of the State Bar of California. Mr. Codron's practice is focused...


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