Is a GRAT Still a Viable Wealth Transfer Tool?

You have been reading the financial headlines (or this blog) I see.

Short answer: Yes.

However, with a tip of the hat to Badfinger and Paul McCartney, if you want a GRAT, here it is, come and get it ... but you better hurry 'cause it's goin' fast. 

As you likely recall, a few months ago the Treasury Department announced its proposed regulations that will, if finalized as currently written, substantially limit the applicability of current valuation discounts for transfers of interests in family-owned businesses.

As reported in a recent Think Advisor article titled “GRAT Valuation Discounts Disappearing Soon,” since the regulations probably will not become effective until the middle of next year, you still have some time to capitalize on the valuation discounts still available.

For many small businesses, a grantor retained annuity trust or “GRAT” can form part of an effective wealth transfer strategy.

This would allow you to use both the value of the GRAT strategy and the family-business valuation discounts yet available under current law.

The purpose behind the proposed changes to Section 2704?

Treasury wants to eliminate the valuation discounts for interests in family-owned businesses when transferred and when the family controls the entity both before and after the transfer.

Currently, the rules allow certain restrictions on liquidation rights in the family-owned business situation that in turn translate into big valuation discounts. However, these restrictions are ignored if they are more restrictive than the default state law that otherwise would apply to the entity.

The proposed regulations would all but eliminate the reference to state laws.

Accordingly, state laws will only be considered when determining whether a discount is appropriate if an applicable state law provision is mandatory.

Also, restrictions that limit a transferor’s ability to require liquidation or redemption of his or her own business interests will be disregarded in valuing the interests.

What will the new rules apply instead?

It will be assumed the transferor has a six-month “put” option to liquidate or redeem the business interests.

In summary, the new proposed regulations would substantially limit the ability of family-owned businesses to take advantage of discounts for "lack of control" over the business or "lack of marketability."

Ouch.

These are the two keys to valuation discounts.

In other words, since no third party buyer would purchase a business interest he or she could not control or freely transfer, then the value of such interest is "worth-less" to anyone owning it.

To use the valuation discounts that currently apply for small business interests, a GRAT strategy can be implemented to “freeze” the current value of these interests and transfer the appreciation to the beneficiaries.

A GRAT combines a trust that is established for a certain predetermined period of time with an annuity that pays the trust creator a set value each year of the trust's existence.

At the end of the GRAT term, the remaining value passes to the beneficiaries outside of the estate of the trust creator.

An experienced estate planning attorney can help you navigate these complexities, but you better hurry because intrafamily valuation discounts may be going fast.

So, how do you find an "experienced" estate planning attorney?

First, ask around. Friends, family and other professional advisors are trustworthy sources.

Second, conduct an "organic" search on "Google" for "estate planning" near you (e.g., "Estate Planning Anytown MoKan").

Third, either way, verify! Check out the education, experience, ratings and client reviews of any attorney before you contact him or her.

How?

Two helpful online resources are just a mouse click away to assist with your due diligence:  Avvo.com and Lawyers.com.

Check any Avvo ratings, client ratings/testimonials and attorney endorsements on Avvo.com and any "peer ratings" by judges/other attorneys and any client ratings/testimonials on Lawyers.com.

In fact, I use both of these services to thoroughly vett attorneys before referring members of our "client" family for legal help in other areas of law or for matters in jurisdictions outside Kansas or Missouri.

Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.

For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.

Reference: Think Advisor (Sept. 14, 2016) “GRAT Valuation Discounts Disappearing Soon”