It’s Good Enough for Walmart: Tax Avoidance with a GRAT

Billionaire Sheldon Adelson is not alone in his disdain for estate taxes. As one of the world’s richest men, Adelson has the ability to hire top attorneys and advisors to employ financial and estate planning tools that ensure his estate pays little or no taxes. One of these tax avoidance tools is the Walton grantor retained annuity trust (“GRAT”). A recent article discusses the use of this popular trust.

Walmart exteriorcropped
(Photo credit: Wikipedia)

Named after Walmart heir Audrey Walton, the Walton GRAT is a popular tool used by the wealthy to avoid estate taxes. Essentially, a Walton GRAT works by rapidly transferring large quantities of stock into a trust fund that requires that the initial investment be returned after two years. If the stock gains value while in the Walton GRAT, the additional value will be left over in the trust. The trust can then transfer the remaining value to a third party without incurring gift tax liability.

Recognizing this loophole, the government sued Audrey Walton for using a similar scheme in 1993. The court ruled in Walton’s favor, thereby legitimizing and nicknaming the Walton GRAT. Since then, many wealthy individuals – such as Facebook chief executive Mark Zuckerberg and Goldman Sachs chief executive Lloyd Blankfein – have benefited from their own use of the Walton GRAT.

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How’s This for GRAT-itude? – Basics of the GRAT

As a recent article explains, a Grantor Retained Annuity Trust (“GRAT”) is a great estate-planning tool for high-net-worth individuals.  This type of irrevocable trust permits you to make a lifetime gift of assets to an irrevocable trust in exchange for a fixed payment stream for a specified term of years.

Often, individuals making large transfers to their beneficiaries choose to utilize GRATs because of associated tax benefits.

A key aspect of GRAT transfers is that they minimize or even eliminate estate and gift tax liability on the transferred assets. Moreover, the creator of a GRAT may receive fixed annual payments for the life of the trust. Through receiving this annuity, the creator is paid back his or her principal, as well as interest. After the trust term has concluded, the remainder of the trust passes to the trust beneficiaries.

When setting up a GRAT, it is important to carefully select a trust term. If the trust term ends while the creator is still alive, the remaining assets will be included as part of his or her gross estate for purposes of determining estate tax liability. Those who anticipate outliving the trust term of their GRAT should consider employing a life insurance strategy to offset any additional tax liabilities.

Those who wish to set up a GRAT should act quickly because the Obama administration may soon eliminate the tax benefits that a GRAT strategy would reap as proposed in the President’s latest Green book proposals.