Probate & Trust Law Section Conference Manual ... - Minnesota CLE

Transferring an asset via a GRAT results in greater value for your beneficiaries than if
you held the assets outright
Cash flow example: $1,000,000 asset
Scenario 1
Scenario 2: Use GRAT
Year Hold asset Grantor GRAT
0 Assets held/gifted to GRAT $1,000,000 $1,000,000
Gift tax incurred at transfer $0
5 Value of asset 1,610,510 1,235,771 374,739
Estate tax (798,813) (612,943) -
Net wealth to beneficiaries 811,697 622,829 374,739
Total value to beneficiaries $811,697 $997,567
Value added by GRAT $185,870
*Assets in GRAT do not receive a step up in basis upon death, if assets are sold after death the total amount to beneficiaries may be lower. For instance, assuming
a zero basis a capital gains tax at 23.8% would result in the value being $89,188 lower than what is shown
Hypothetical average return = 10%.
Assumptions: Initial price per share = $5; IRS discount rate = 1.4%; first year annuity rate = 14.08% valuation discount: 0%;
effective transfer tax rate (for transfers at the end of year 5) = 49.6%. Annuity escalation rate = 20%. Assumes grantor survives term.
Numbers have been rounded for convenience, are only estimates for illustrative purposes and should not be relied upon. Corporate insiders
should consult with securities counsel as to any reporting issues under SEC Section 16 of the Securities Exchange Act of 1934 associated
with receiving shares in-kind.
Note: Above example is for illustrative purposes only. These materials should not be construed as providing legal, tax, or accounting advice.
GRATs involve complex tax and, in the case of insiders, securities laws issues that should be discussed with your own advisors and company
counsel. Annuity will be paid for full term to the grantor or, in case of the grantor’s death, to the grantor’s estate. Calculation is based on 2000
Tax Court ruling in Walton v. Commissioner (115 T.C. No. 41 (Dec. 22, 2000)).
CONFIDENTIAL
Note: This presentation is for educational purposes only. This is not for distribution outside of this seminar.
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