Grantor Retained Annuity Trust
In a so-called grantor retained annuity trust, or “GRAT,” you transfer assets to an irrevocable trust. The best assets to transfer are those that generate substantial income or might show substantial appreciation. The goal in using a GRAT is to pass on to the next generation the assets you contribute to the trust while paying no or minimal gift or estate taxes.

As the donor of the GRAT, you would retain the right to receive a fixed amount of money from the trust each year, and these distributions to you would continue for a pre-determined number of years. Once the trust payments to you ends the remaining trust assets then pass to family members you have chosen.

Assets you transfer to a GRAT during your lifetime are technically subject to gift taxes, but generally no taxes are actually paid on such transfers. Tax liability is typically eliminated -- or at least minimized -- because the value of the assets transferred to the GRAT is deeply discounted. The IRS allows a discount because your children or other family members will have to wait for years to receive the assets from the trust. Therefore, by using a GRAT to take advantage of today’s low interest rates, you can pass large amounts to the next generation with little or no estate or gift taxes.

The one risk in using this type of trust is that if you die before the reserved payments to you have been completed, then all of the GRAT assets will be subject to estate taxes when you die. But, then again, this would have been the case in any event if you had never set up the GRAT to begin with, so there is little to lose by using the GRAT!

Private Annuities
In a typical private annuity, you would sell property -- such as an apartment building -- to your child who “pays” you for the property by giving you a written agreement to pay a fixed income for life. If the fair market value of the payments to you promised by your child equals the value of the property you sold, then the transfer of the property to your child is not seen as being a gift. This avoids your having to pay any gift taxes on the transferred property, and the property also is not subject to estate taxes on your death. Using a private annuity strategy of this type in today’s low interest environment allows you to minimize the periodic payments your child must make to you. Thus, you can transfer valuable assets to your child free of gift and estate taxes while requiring only modest payments back from your child.

Charitable Lead Trusts
Charitable lead trusts have been used infrequently in the past due to their meager tax advantages, but these trust can really shine when interest rates are low. In addition to their tax advantages, charitable lead trusts can also offer you a very cost-effective way to make gifts to your favorite charity.

In a charitable lead trust strategy, you first transfer assets to the trust, and the trust then makes periodic payments to your favorite charity for as long as you like. At the end of a specified number of years, the trust terminates and the property is typically distributed to your children, grandchild or other designated family member.

There are two important tax advantages in using a charitable lead trust. First, you are entitled to take a charitable deduction for the fair market value, determined per IRS rules, of the periodic payments received by the charity. If your fund the trust during your lifetime, you can claim a charitable income tax deduction. If instead you fund the trust under your Will following your death, then your estate can claim a charitable deduction for estate tax purposes.

The second advantage in using a charitable lead trust is that gift taxes and estate taxes are substantially reduced on the property that will ultimately be distributed to your family members when the trust ends.

All told, today’s low interest rates offer especially attractive estate planning strategies. And that could bode well for both you and your family in the years ahead.

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