As to assets that are relatively volatile, or assets that seem likely to appreciate in value, then you should consider creating one or more Grantor Retained Annuity Trusts (“GRATs”) to transfer future appreciation of these types of assets to your family members. Generally, to establish a Grantor Retained Annuity Trust (“GRAT”), you make a transfer of property to the Trustee of a trust that you create. During a specified term of years, you retain a right to receive a fixed annual payment (an annuity) to be paid at the end of each year during the reserved term. After the end of the term, the assets remaining in the trust would go to your family members, or to trusts for their benefit. For a tax reason, GRATs are more often used to benefit trusts for children, nieces, or nephews, or to add to lifetime family trusts, rather than grandchildren, great nieces, or great nephews. At the time you make the transfer of assets to the GRAT, you are making gifts to your family members. However, in valuing the gift, you get to deduct the present value of your reserved annuity payment. Thus, the gift to your family members is less than the value of the assets you put into the trust.

A GRAT also can be structured such that there is no gift or a “near-zero” gift to your family members. To do this, you must retain a large annuity pay back. A zero-gift GRAT has the effect of transferring to your family members only the growth (if any) in the assets that exceeds the amount paid back to you or the survivor of you.

As a general example, if you funded a GRAT in May 2020 with $1,000,000 in assets that grow by 10% each year, under a three-year scenario (with you receiving annually a payback of 33.5% of the initial value of the trust assets, or $335,000 each year for three years), your family members would receive approximately $222,150 at the end of the three-year term. If the trust assets grew by 20% each year, your family members (or trusts for their benefit) would receive $508,600 at the end of the three-year term. The gift made in 2020 would be valued at $10,879. However, you need to survive the term of the trust or else at least part of the trust assets will be included in your estate. Also, if the asset declines in value, then the family members (or trusts for their benefit) receive nothing at the end of the three-year term. These are only approximate examples. The figures for your situation would need to be adjusted to reflect your ages, the value of the initial contribution, the length of time the GRAT runs, and the appropriate federal interest rate at the time the trust is created.

The payment back to you does not have to be in cash – but rather can be in the same stock or “fund interest” that you use to fund the GRAT in the first place. Also, you can contribute each year’s payout to another GRAT such that you have “rolling GRATs” that pass all of the appreciation to your family members.

During the term of the GRAT you pay all income taxes on the trust assets – the trust is “invisible” for income tax purposes. Also, if the GRAT owns closely held business interests, then an appraisal is needed each year to determine the percentage interest in the business to transfer back each year.