Grantor retained annuity trusts (GRATs) are typically used as an estate freeze technique, removing appreciation in excess of a fixed rate of return from the grantor’s taxable estate. However, a strange brew that blends a GRAT with a securities loan can melt—not merely freeze—the grantor’s taxable estate. This “leveraged GRAT” is ideal for families with a large concentration of a single stock owned by an irrevocable trust. The seniorfamily member borrows a fixed number of shares from the trust, agreeing to pay back identical shares as well as any income earned on the shares in the interim. If the shares appreciate, the annuity payments the grantor receivesfrom the GRAT will be insufficient to return the same number of sharesto the lendertrust, forcing the grantor to deplete his or her own estate to repay the securities loan.
Introducing the estate “melt”
In recent years, the low interest rate environment has created ideal conditions for families with large concentrations of wealth to engage in “estate freeze” transactions. The purpose of an estate freeze is to shift assets to the next generation at current valuations, minimizing or eliminating transfer taxes while removing future appreciation from the transferor’s estate. One popular freeze technique—the grantor retained annuity trust (GRAT)—is specifically blessed by statute. A successful GRAT can result in the significant transfer of otherwise taxable wealth by an individual to his or her descendants or other beneficiaries with little or no gift tax consequences. However, a traditionally structured GRAT removes only future growth in value from a taxable estate. If the transferor already owns significant wealth in his or her individual name, an estate freeze will do nothing to shield that existing value from the estate tax.
