Heirs vs. Descendants

 Jeffrey R. Gottlieb writes at Illinois Estate Plan blog about the important distinction between one’s heirs and one’s descendants. Read his great post here.


Death and Taxes and Zombies

English: Front Cover of "The Do-it-Yourse...

If the CDC has begun preparations for a Zombie Apocalypse, it is prudent for accountant and lawyers to consider the tax (both estate and income tax!) implications of the undead among us:

  • If a Zombie is undead, are his assets subject to probate?
  • Does his life insurance policies pay out to the beneficiaries?
  • Can a Zombie earn income? (It seems more likely that a Zombie would have unearned income…)

SSRN Link: Death and Taxes and Zombies by Adam Chodorow.

A few words on GRATs

GRATs are:

  • Grantor Retained Annuity Trusts;
  • a vehicle for transferring assets’ future appreciation to children;
  • an estate tax freeze; and
  • in the news, with congressional proposals to change the requirements for valid GRATs.

Grantor Retained Annuity Trusts (GRATs) are arrangements where assets are put into trust, and an annuity is paid from the trust back to the grantor.

Because the grantor retains the right to receive income from the trust, the trust is a grantor trust for income tax purposes; this means that ALL of the income earned by the trust is taxable to the grantor.

Transfers to a GRAT are taxable gifts, and the value of the gift is the fair market value of the assets transferred into the trust less the value of the annuity due back to the grantor. Valuing the assets transferred to the trust will often require an appraisal (unless the values are readily attainable, e.g. marketable securities).

The trick with a GRAT is valuing the annuity due back to the grantor. The annuity is valued using an IRS prescribed discount rate defined in section 7520 of the Internal Revenue Code (and therefore called the 7520 Rate.)

As stated above, transfers to GRATs are taxable gifts, however the tax can be minimized by arranging for the value of the annuity at or near the value of the assets transferred. If $1,000,000 in assets are transferred to a GRAT, and the value of the annuity is calculated to be $999,990, then the taxable gift is only $10.

This type of GRAT is called a zeroed-out GRAT because the gift is (close to) zero. Creating a zeroed-out GRAT reduces the gift tax, but limits the amount of transfer to the grantor’s children: why? Using the above example, almost all of the $1,000,000 contributed to the GRAT is returned to the grantor. What will get transferred to the children is the appreciation on the assets in excess of the 7520 rate.