Tips for Using GRATs Prior to the Effective Date for 2704 Proposed Regulations

In early August the Treasury Department issued proposed regulations that eliminate or restrict valuation discounts on family owned business under Internal Revenue Code Section 2704. While the regulations will go into public hearing at the beginning of December, it is important to consider the potential impact for family business owners now. 

The potential loss of discounts could be devastating for estate planning purposes. One of the planning techniques to consider in light of this is the Grantor Retained Annuity Trusts, also referred to as a GRAT. A low interest rate environment would increase the probability of success for a GRAT. Currently the 1.4% rate is a low threshold to exceed and makes GRATs useful from that perspective. It is possible, however, that a new administration will pass new tax legislation.

It is also possible there will be a loss of discounts after the year’s end or shortly thereafter when the regulations are anticipated to become effective. GRATs take assets remaining at the end of a trust term to the remainder beneficiaries. This will be the excess of the appreciation of any assets given to the GRAT assets over an annuity of payment includes a return of the principle value of the gift. The appreciation over this hurdle amount is transferred free of gift tax. In order to learn more about how this might impact you, consult with an experienced New Jersey estate and asset protection planning attorney today.