THE ANDERSEN FIRM A PROFESSIONAL CORPORATION

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1 ATTORNEYS AT LAW THE ANDERSEN FIRM A PROFESSIONAL CORPORATION Grantor Retained Annuity Trusts (GRAT) and Grantor Redeemed Unitrusts (GRUT) New York Office 110 E 37 th Street New York, NY South Florida Office 500 E Broward Blvd. Suite 1600 Ft. Lauderdale, FL West Florida Office 7273 Bee Ridge Road Sarasota, FL Tennessee Office 862 Med Tech Parkway Suite 200 Johnson City, TN The Andersen Firm, A Professional Corporation, All Rights Reserved. Revised 4/16/14

2 The Andersen Firm A Professional Corporation Any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

3 The Andersen Firm A Professional Corporation AV Preeminent Rated Law Firm Practices in Estate Planning, Estate Settlement, Estate Litigation, Asset Protection, and Elder Law

4 GRATs and GRUTs, what are they? A Grantor Retained Annuity Trust (GRAT) is an irrevocable trust in which the grantor transfers assets into the trust and retains the right to annual payments of a fixed amount of principal and interest for a prescribed number of years. A Grantor Redeemed Unitrust (GRUT) is an irrevocable trust in which the grantor transfers assets into the trust and retains the right to annual payments of a fixed percentage of principal and interest for a prescribed number of years. With both trusts, at the end of the period the assets go to the beneficiaries in accordance with the grantors intentions.

5 When is it Appropriate to Use a GRAT/GRUT? When you have an asset that you expect to appreciate significantly which you will want to eventually pass on to beneficiaries.

6 What is the Value of the Gift? The IRS values the gift by deducting the present value of the payments to the grantor from the total value of the trust assets. The value of the gift is determined by the annuity payment amount, the length of the trust term and the interest rate used in the IRS tables. The value of the gift can be such as to make the value of the current gift be equal or close to zero.

7 Drawbacks Grantor loses control over trust assets It is a grantor trust for income tax purposes, all the trust income will be taxable to the grantor, whether or not it is distributed. For this reason such trusts are normally invested for capital appreciation rather than income, to reduce current taxation.

8 Drawbacks (Cont.) Should the donor die before the expiration of the term of the trust, the full value of the assets will be included in his/her taxable estate. Costs: setup, administration expense, attorney fees, property title costs (if funded with property), accounting fees, appraisal fees, and trustee s fees.

9 Example 1 70 year old client and spouse receive a recommendation to transfer $1 million to a GRAT in order to remove principal and future appreciation from his estate. The government assesses the value of the $1 million asset at less than $600,000. This provides a 40% discount on the gift and therefore saves an approximate 50% tax on the $400,000, which amounts to a savings of $200,000 in gift tax.

10 Example 2 Assume that a 60 year old client transfers a $1 million asset to the trust. The IRS interest rate is 5.8%, the term of the trust is 10 years, and we will assume that the growth of the principal is 8% with an annuity payout of $50,000. Further assume the trust produces no income. Based upon the above assumptions, the current taxable gift will be $628,485.

11 Example 2 (cont.) $628,485 times 45% equals $282,878 owed in taxes. May also borrow against lifetime gifting coupon so that no taxes are actually paid. Will save over $990,000 in estate taxes by using the GRAT, with a net tax savings of around $700,000. The remainder that will go to the beneficiaries at the end of the trust term will be $1.4 million while the grantor would have received $500,000 in annuity payments.

12 Example 2 Details Type of Calculation: Term Transfer Date: 1/ Rate: 5.80% Grantor's Age(s): 60 Income Earned by Trust: 0.00% Term: 10 Total Number of Payments: 10 Annual Growth of Principal: 8.00% Pre discounted FMV: $1,000,000 Discounted FMV: $1,000,000 Percentage Payout: % Exhaustion Method: IRS Payment Period: Annual Payment Timing: End Vary Annuity Payments? No Does it Benefit the Transferor's Family? Yes With Reversion? No

13 *** 2702 IS Applicable *** Base Term Certain Annuity Factor: Frequency Adjustment Factor: Annual Annuity Payout: $50, Initial Amount of Payment Per Period: $50, Value of Term Certain Annuity Interest: $371, Value of Grantor's Retained Interest: $371, ) Taxable Gift (Based on Term Interest): $628, Economic Schedule Beginning 8.00% 0.00% Annual Year Principal Growth Annual Income Payment Remainder 1 $1,000,000 $80,000 $0 $50,000 $1,030,000 2 $1,030,000 $82,400 $0 $50,000 $1,062,400 3 $1,062,400 $84,992 $0 $50,000 $1,097,392 4 $1,097,392 $87,791 $0 $50,000 $1,135,183 5 $1,135,183 $90,814 $0 $50,000 $1,175,998 6 $1,175,998 $94,079 $0 $50,000 $1,220,077 7 $1,220,077 $97,606 $0 $50,000 $1,267,684 8 $1,267,684 $101,414 $0 $50,000 $1,319,098 9 $1,319,098 $105,527 $0 $50,000 $1,374, $1,374,626 $109,970 $0 $50,000 $1,434,596 Total $1,000,000 $934,596 $0 $500,000 $1,434,596

14 2005 The Andersen Firm, A Professional Corporation.

15 Example 3 Using same value of asset, age of grantor and assumptions from Example 2 with the exception that the annuity payment is $134,584. Based upon the new assumptions, the current taxable gift will be $.50. Will save over 990,000 in estate taxes by using the GRAT. The remainder that will go to the beneficiaries at the end of the trust term will be over $200,000 while the grantor would have received $1.3 million in annuity payments.

16 Example 3 Details Type of Calculation: Term Transfer Date: 1/ Rate: 5.80% Grantor's Age(s): 60 Income Earned by Trust: 0.00% Term: 10 Total Number of Payments: 10 Annual Growth of Principal: 8.00% Pre-discounted FMV: $1,000,000 Discounted FMV: $1,000,000 Percentage Payout: % Exhaustion Method: IRS Payment Period: Annual Payment Timing: End Vary Annuity Payments? No Does it Benefit the Transferor's Family? Yes Is Interest in Trust Retained by Transferor or Family Member? Yes With Reversion? No

17 *** 2702 IS Applicable *** Base Term Certain Annuity Factor: Frequency Adjustment Factor: Annual Annuity Payout: $134,584 Initial Amount of Payment Per Period: $ Value of Term Certain Annuity Interest: $999, Value of Grantor's Retained Interest: $999, (1) Taxable Gift (Based on Term Interest): $.50 Economic Schedule Beginning 8.00% 0.00% Annual Year Principal Growth Annual Income Payment Remainder 1 $1,000,000 $80,000 $0 $ $945,416 2 $945,416 $75,633 $0 $134,584 $886,465 3 $886,465 $70,917 $0 $134,584 $822,798 4 $822,798 $65,823 $0 $134,584 $754,038 5 $754,038 $60,323 $0 $134,584 $679,777 6 $679,777 $54,382 $0 $134,584 $599,575 7 $599,575 $47,966 $0 $134,584 $512,957 8 $512,957 $41,036 $0 $134,584 $419,410 9 $419,410 $33,552 $0 $134,584 $318, $318,379 $25,470 $0 $134,584 $209,265 Total $1,000,000 $555,105 $0 $1,345,840 $209,265.48

18 2005 The Andersen Firm, A Professional Corporation.

19 Conclusion The examples presented show the power of a GRAT/GRUT in estate planning and can be varied further using longer trust tiers, asset amounts, income production of the trust, etc. This is not one size fits all planning. There are many factors which a client should consider when thinking about setting up a GRAT/GRUT.

20 The Financial Advisors Easy 3 Step Process for Estate Planning 1. Call Angela Christian at to set up an appointment for client. 2. Ask client for current estate planning documents and forward them to The Andersen Firm. 3. Ask clients to fill out snapshot questionnaire and forward to The Andersen Firm.

21 ANY QUESTIONS?????????????????????????????