Friday, June 3, 2011

GRATs Up for Grabs Again

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Rep. Sander Levin (D-Mich.), Chairman of the House Ways and Means Committee, on June 9 introduced H.R. 5486, the Small Business Jobs Tax Relief Act of 2010. An earlier version of this legislation (H.R. 4849) was passed by the House in March, but was never taken up by the Senate. 

Estate planners may not be interested in jobs relief, but they should look at Rep. Levin’s proposal for paying for that relief: minimum 10-year terms for GRATs.  The Bill would require that any GRAT funded after the date of enactment: (1) have a term of no less than 10 years, (2) not have decreasing payments during those 10 years, and (3) have a remainder interest valued at more than zero.  Treasury has long been concerned about the use of rolling two-year GRATs as a means of reducing the investment and mortality risks in GRATs, and recommended a minimum 10-year term in the two “Green Books” issued by the Obama Administration. 

The “very preliminary” revenue estimates released by the Ways and Means Committee indicate that the GRAT amendment will raise $5.297 billion in revenue over a 10-year period. That seems optimistic. Although the Committee did not explain its reasoning, it probably assumes that the elimination of short-term GRATs will result in increased estate tax collections, as taxpayers are restrained in the amount of wealth that they can pass out of their estates tax-free before death. Because such estimates are based on current law, this one must assume that post-2010 estates will be subject to a $1.0 million estate tax exemption and a top rate of 55%, which is unlikely to be the case. Moreover, there are other planning techniques, such as a sale to a grantor trust, that are just as effective in moving appreciating assets out of the estate at a minimal cost in transfer tax. Taxpayers and their advisors will quickly adapt to any change. 

Update: On June 15, the House of Representative voted 247-170 to approve H.R. 5486, including the GRAT provision. Action on the bill now moves to the Senate, where its prospects are uncertain.

Harold W. Pskowski, Managing Editor for Estates, Gifts and Trusts

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