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Great Info on GRATs

Definition of trustA GRAT is a trust that is typically created by a grantor who transfers assets, like stock or closely-held business interests, to the GRAT for a specific period of time—usually between five and ten years. A GRAT, however, can also be set up for a two-year term, says AccountingWeb’s recent article, “The Beauty of Grantor Retained Annuity Trusts.”
The language of the GRAT will be written, in many instances, to provide that a parent retains the right to receive back, in the form of annual fixed payments (an annuity), 100% of the initial fair market value of the assets transferred to the GRAT.
The grantor will also receive a rate of return on those assets based upon the IRS-prescribed interest rate, which is called the “7520 rate,” after the Internal Revenue Code Section 7520. Section 7520 specifies the way in which this rate is to be calculated. For example, the IRS’s 7520 rate for November 2016 is 1.6%.
An excellent feature of a GRAT is that any asset remaining in the GRAT at the end of the trust’s term, will pass to the named beneficiaries without any additional gift tax. The named beneficiaries, in many cases, will be the grantor’s children. This type of GRAT is often called a “zeroed-out GRAT” because it doesn’t end up with the grantor making a taxable gift due to the retention of an annuity equal to 100% of the assets contributed to the GRAT.
To illustrate this further, the stock of a family business is placed into a GRAT for a term of ten years, and the value of that stock is $500,000. (Note: if you put the stock of an S corporation into a GRAT, you are required to refile the S-election under the QSub rules.) The term of the GRAT is 10 years, and the 7520 rate is 1.6%. Based on these assumptions, you would pay the grantor $50,000 a year, plus 1.6% in interest.
What the GRAT does is freeze the asset—so in ten years, after the GRAT has zeroed out, the appreciated value would remain in the GRAT and pass to the beneficiaries, gift-tax free.
Ding Ding…. Warning: there’s just one little issue with the GRAT. However, it is an important one. If the grantor dies during the term of the GRAT, the assets remain in the grantor’s taxable estate and the amount does not avoid gift tax.
Therefore, the GRAT isn’t absolutely perfect, but it can be used as an effective way to remove assets from an estate in most instances. Speak with an experienced estate planning attorney to learn if a GRAT should be considered for your estate plan.
Reference: AccountingWeb (November 18, 2016) “The Beauty of Grantor Retained Annuity Trusts”

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Estate Planning Ideas to Help Business Succession

Tablet with penThe Huffington Post says in "5 Things Estate Planning Can Do for You and Your Business," that co-owners, family members, and ex-spouses can suddenly come out of nowhere to claim some of your successful business. Your company is reduced to nothing in less than a year. However, proper estate planning protects your business in case there are unexpected circumstances.
Estate planning can be used by business owners to avoid unfortunate events and to prevent seizure and depreciation of the business assets. This can decrease the stress and hassles that occur immediately after you die. Here are some good estate planning ideas to help your business.
1. More options for your business. Solid estate planning gives you the option of buy-sell agreement. If your business has one or more co-owners, this agreement ensures that upon the death of any owner, the interest of the deceased is automatically purchased by the other owner(s). The beneficiaries of the deceased owner, such as the spouse, children, or other family member won't unintentionally become owners. This strategy can alleviate some stress in an already stressful situation, immediately after the death of an owner or part owner of a business.
2. Guarantee the longevity of your business. Sole proprietors, small businesses, and big companies all want to pass their enterprises to future generations to keep their legacies alive. Estate planning can ensure the longevity of your business with a business transition plan.
3. Minimize taxes. A business owner can transfer business assets to his or her children and retain a source of income by establishing a grantor retained annuity trust (GRAT). This will help make sure that when business assets grow over time, the appreciation in equity and value of your business will not be hit with huge tax bills.
4. Succession planning for your business. Good estate planning will ensure that your business is preserved and operating the way you'd want it to run. Any issues in the transfer of management and ownership when you're gone are conducted effectively with wise estate planning.
5. Plan for the future. A good succession plan for your business could take several years to create, so start early. This can help you see the bigger picture for your business and present new ideas.
Reference: Huffington Post (March 31, 2016) "5 Things Estate Planning Can Do for You and Your Business"

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