GRAT (Granted Retained Annuity Trusts Terms) Proposed Tax Changes

About Step Up or Step Down in Basis of Property Value Upon Death

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Granted Retained Annuity Trusts Terms

Powerpoint slides on a superior retirement planning strategy called Roth IRA on Roids which allows for tax-free distributions, tax-free growth, guaranteed principal and guarateed death benefits.The current law pertaining to GRATs states that a GRAT is a very specific type of government-sponsored irrevocable trust where an individual places property into a trust, but they retain the right to receive income. These trusts usually come to an end after a specific number of years. Once the trust ends, the property that is in the trust will go to family members. The value of that property that was in the trust is considered a taxable gift made to the family. Usually, property that is put into this type of trust is believed to have the possibility to increase in value. When the trust is set up, the gift tax must be paid. Due to this, the trust will not be included in your estate if you die. Your family will receive the growth without you having to pay a gift tax and without them having to incur estate taxes. The more the value grows, the less will be paid for gift and estate taxes. However, if you die before the GRAT ends, the property that is in the trust will be considered part of your gross estate. You always want to plan things so the GRAT will end before you die.

This is a technique that has been mastered by tax payers. People who place their property in a GRAT will often reduce how long the trust lasts. This significantly reduces the chances of dying before the trust ends. There are some GRATs that will end in just 2 years. Many tax payers retain large annuity interests, which causes the gift tax value of the remaining interest to be so small that there will be little gift tax involved. The IRS believes that terms regarding a GRAT need to change.

The proposed changes would require that the term of a GRAT is at least 10 years. This will increase the chances that you will die before the GRAT ends. As a result, the government will be able to collect more taxes. This change would provide the government with an additional $3.25 billion. The GRAT is not the best type of irrevocable trust and most experts will tell you it is not the best way to save on taxes for investments either – even before the changes that are proposed. An Ultra Trust™ is an irrevocable trust that is much more superior and has all of the benefits of a GRAT and more. Click here to learn more on the Ultra Trust™-Irrevocable Trusts.

Step up or Step Down in Basis of Property Valuation Upon Death

The current laws provide a step down, or a step up, in basis upon a person's death. The new basis after death is typically the fair market value of the property upon death. The estate will report the same value. This is for estate tax purposes. The current laws do not state that the recipient of the property must use the same value. When it comes to lifetime gifts, you use a carryover basis. This will be your basis plus any gift tax that is paid when the gift is made. If the property's value is less than the basis, the basis of the recipient will be limited to the actual value of the property. If income is received from a trust or an estate, the estate or trust will report a taxable income on a Schedule K-1. It is required that you use the same numbers when you are filing your tax returns. There is no basis information included on the Schedule K-1.

The government wants to change the current laws because it will be easier if everyone uses the same numbers. In sum, if you are receiving property for any estate, you will have to use the same value that the estate reported as your basis. To determine basis, the executor or donor of the property can make sure others will get the information needed.

The proposed changes to the current law will require the executor to report all information to the recipient as well as to the IRS. The Treasury will develop certain rules for the estates that neglect to file returns. The Treasury will also provide rules for situations in which the joint owner may have better information. This proposal will increase taxes by $1.9 billion.

Rocco Beatrice, CPA, MST (Master of Science in Taxation), MBA (Master of Business Administration), BSBA (Management/Accounting), CWPP (Certified Wealth Preservation Planner), CMMB (Certified Mortgage Broker), CAPP (Certified Asset Protection Planner), Managing Director, Estate Street Partners, LLC. Mr. Beatrice is an asset protection, award-winning trust, estate planning and tax expert.

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