Both President Barack Obama's
budget proposals for 2010 and
2011 and a recent version of the
"Small Business Jobs Tax Relief Act"
(H.R. 5486), which passed the House on
June 15 and was merged into the "Small
Business Lending Fund Act" (H.R. 5297),
contained a proposal to require a minimum
10-year term for grantor retained
annuity trusts (GRATs).
The GRAT provision is the primary
revenue offset ($5.3 billion over 10 years)
in the House's small business jobs measure,
which was referred to the Senate
Finance Committee on June 18. Having
failed to find compromise on the tax
extenders and jobs creation bill after
three weeks of floor debate, Senate
Majority Leader Reid (D-Nev.), indicated
on June 24, indicated his intent to pivot
to H.R. 5297 and bring it to the Senate
floor without going through committee.
It is not expected, however, that the
first draft of the Senate's substitute
amendment to the small business measure
will include the GRAT provision
as a revenue offset, which is likely an
indication that many in the Senate prefer
to reserve estate planning revenue
provisions for future estate tax legislation.
Although it has been suggested to
include an estate tax amendment on the
Senate's substitute to H.R. 5297, this is
not expected to occur.
The GRAT provision, Section 2702 of
the Internal Revenue Code, provides that
if an interest in a trust is transferred to
a family member, the value of any interest
retained by the grantor is zero for
purposes of determining the transfer tax
value of the gift to the family members.
This rule does not apply
if the retained interest
is a "qualified interest"
- i.e., a fixed annuity
or unitrust interest, as
defined in applicable
Treasury regulations. A
GRAT is one such qualified
interest, and current
law prescribes no
or maximum length of
term for a GRAT.
GRATs have proven
to be a popular and
efficient technique for
while minimizing the
gift tax cost of transfers,
providing that the
grantor survives the
GRAT term and the trust assets do
not depreciate in value. Taxpayers have
become adept at maximizing the benefit
of this technique, often by minimizing
the term of the GRAT (thus reducing
the risk of the grantor's death during
the term), in many cases to two years,
and by retaining annuity interests significant
enough to reduce the gift tax
value of the remainder interest to zero
or to a number small enough to generate
only a minimal gift tax liability.
The bill's GRAT provision, which is
identical to the provision in H.R. 5486,
requires that there be some downside
risk in the use of this technique by
imposing the requirement that a GRAT
have a minimum term of 10 years (a
number that appears to have been chosen
because it is the same as the 10-year
minimum term of so-called "Clifford"
trusts that were created before March
2, 1986). The provision also requires
that the annuity (determined on an
annual basis) does not decline during
the first 10 years of the annuity term
and that the remainder interest must
have a value greater than zero at the
time of the transfer (although no minimum
value is prescribed).
At the very least, the bill would
increase the risk of the grantor's death
during the GRAT term resulting in the
loss of any anticipated transfer tax benefit.
This loss would presumably be the
Treasury's gain to the tune of approximately
$5.3 billion over the next 10
years. (We note that this revenue estimate
is higher than the $4.45 billion
revenue estimate in H.R. 5486.) As with
previous versions of this provision, it
would be effective on "date of enactment."
Without a change in the effective
date in any final version of the legislation
that may be adopted, the new GRAT
restrictions would apply to GRATs executed
on or after the date of enactment.
As the intense focus on our fiscal
dilemma persists, tax policy decisions
will continue to be scrutinized, and the
hunt for revenue will continue to drive
the debate. It is likely that the GRAT
provision will ultimately be enacted as
a revenue offset to deficit spending legislation.
So the time to plan is now, since
the provision would grandfather existing