Then, he and his wife, Lee-Hwa, each transferred limited partnership shares into a GRAT.
The Grat is a peculiar creature that rich people use to carry wealth from one generation to the next.
It's even more complicated than a GRAT, but doesn't run the risk that the donor will die too soon.
Here the grantor must survive the term of the GRAT for the asset to be excluded from his estate.
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When you give an asset to a GRAT, you retain the right to regular payments for a set time period.
If the value of the trust assets increases by more than the hurdle rate, the GRAT will be economically successful.
This structure resembles a GRAT except that the initial payout is to one or more charities rather than to you.
To get the most out of this tax dodge, you should set up not one Grat but a lot of them.
With a GRAT, a grantor puts assets into a trust and takes back an annuity payout for typically two to three years.
The donor's age is a factor because if he dies before the end of the GRAT term, the stock bounces back into his estate.
In that case, the excess appreciation will go to family members (the remainder beneficiaries) or to trusts for their benefit when the GRAT term ends.
When the GRAT's term ends, the asset goes to the beneficiaries free of gift or estate tax on the appreciation, even though it has been transferred.
The technique, known as a grantor retained annuity trust, or GRAT, allows rich families to pass on wealth while dramatically cutting their estate and gift tax bills.
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If the assets put in a GRAT appreciate faster than a set rate--4% a year for GRATs set up in December 2002--you pass on assets gift-tax free.
For the moment, it is possible to form what's called a zeroed-out GRAT, in which the remainder is theoretically worth nothing so that there is no taxable gift.
That increases the risk the person setting it up will die during the term of the GRAT, making GRATs less attractive for the older folks who typically set them up.
In particular, a GRAT may appeal to people who have a liquidity event, such as a sale, on the horizon, or expect depreciated assets to recover during the trust term.
"If you're thinking about setting up a GRAT, do it now while you know you can, because you may not be able to do it as favorably tomorrow, " Mr. Steiner says.
Wealth advisors have been telling clients all year that if you want to shift wealth to your kids or grandkids with a so-called GRAT, you should be doing one sooner rather than later.
The first is a GRAT (grantor retained annuity trust ), which Facebook billionaires Mark Zuckerberg and Dustin Moskovitz set up to shelter gains that otherwise would be taxable to their as yet-unborn heirs.
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Another reason to do a GRAT now, Rico points out, is that legislation cracking down on GRATs has been surfacing all year in various bills as a revenue raiser, and is likely to make it into law.
This greatly accentuates what is called the "mortality risk" of a GRAT: if the person setting up the trust dies during the trust term, all or part of the trust assets will be included in her estate for estate tax purposes.
With a GRAT, the owner of a company can transfer stock in the firm into a trust for the benefit of heirs and take back an annuity representing the current value of that stock plus a government-specified interest rate, currently 1%.
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