3: A grantor retained annuity trust (GRAT). A GRAT allows you to transfer appreciation of assets to the next generation tax-free. The assets you put in a GRAT will provide for a fixed yearly sum of money, called an annuity, paid to you for two or three years—the usual term for a GRAT. The payments are usually set up so that they equal the value of the property you contributed to the trust; the GRAT is then considered to be zeroed-out.
“If the investments in the GRAT perform well, you can potentially distribute significant amounts to your beneficiaries.” – Wilms
But if the assets appreciate in value, as described below there should be assets remaining at the end of the trust term, which your kids get free of tax. This works because the IRS assumes that the assets will grow at a certain rate of return, which in today’s low interest rate environment is about 2%. If the assets in the GRAT appreciate at a rate that exceeds that assumed rate of 2% return, your kids get the bounty clear of gift tax.
“This is a great time to fund a GRAT,” adds Erin Wilms, Head of Advanced Planning for UBS Financial Services Inc., “because the rate at which your assets must appreciate in order to accomplish wealth transfer is at historical lows. If the investments in the GRAT perform well, you can potentially distribute significant amounts to your beneficiaries. You may even be able to lock in the gain by substituting less volatile assets in the GRAT.”
4: A dynasty or multigenerational trust. A sizeable gift to your grandkids in your will could trigger the dreaded 40% generation skipping transfer (GST) tax in addition to a 40% estate tax. Instead, you can fund a dynasty or multi-generational trust with your federal gift and GST exemptions, which is $5.45 million in 2016. The gift incurs no tax when you give it. Generations from now, if the assets have grown manyfold, your grandkids and future heirs can enjoy your gift free of tax.
It takes a lot of planning to make sure that your money both serves your needs and provides for your family efficiently. Speak with your Financial Advisor to explore appropriate ways to move ahead with your financial goals, and of course, discuss these matters with your independent legal or tax adviser.