How to use a GRAT: Simple Question Checklist

How to use a GRAT: Simple Question Checklist

By: Martin M. Shenkman, CPA, MBA, JD

Should I use a GRAT?

  • Financial: If securities, long term to lock in low interest rates versus short term to lock in volatility. Asset allocation versus location. Single asset class GRATs.
  • Legal: Outright versus trust distribution at end of GRAT term; state law considerations - should you be in Delaware. How should power to substitute be used? How should grantor trust status be structured?
  • Estate Planning: Grantor trust status post GRAT term; using with ILIT as remainder beneficiary to payout split-dollar arrangement.
  • Accounting: If funded with business or real estate interests rather than stock, proper operation of entities held by GRAT, review of expenses and deductions on entity to avoid indirect additional contribution to GRAT, records for trust; monitoring payments.
  • Insurance: Assuring business/real estate held in part by GRAT is properly insured. Using life insurance to back stop mortality risk of GRAT.
  • Other: Possible legislation to expand estate tax or to restrict GRATs with a 10% minimum gift should be considered in formulating planning.
  • If real estate or family business interests are placed in GRAT, parent/donor desire for control conflicts with tax goals. Family use of entity as personal pocket book can undermine planning.
  • Financial planners/ Wealth managers like 2 year rolling GRATs whereas for asset protection the use of longer term GRATs may be preferable.
  • Wealth managers prefer domestic trust with Grantor as sole trustee since it simplifies and gets plan in place cheaper. Estate planners prefer an institutional trustee in Delaware, South Dakota or Alaska.

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