April 2020 Edition
Stock Market Downturn, Low Interest Rates Provide Perfect Opportunity For GRATs
No one will dispute that we are going through some unprecedented and challenging times. It has been said, however, that within every dark cloud is a silver lining. As an example of this principle, current economic conditions (historically low interest rates combined with a significant downturn in the stock market over the last month) now provide a unique opportunity to avoid the payment of federal gift and estate taxes on asset transfers to children, grandchildren or other beneficiaries. The device to be used to achieve such a result is a “grantor retained annuity trust” (GRAT).
A GRAT is an irrevocable trust in which the donor retains the right to receive annual annuity payments from the GRAT for a term of years (usually 2 years) with an irrevocable remainder interest (after making the annual annuity payments to the donor for the fixed term) to be distributed to the persons designated in the GRAT as remainder beneficiaries. A GRAT is typically structured so that the value of the interest retained by the donor (using the applicable IRS interest rate to determine such value) is equal to the fair market value of the property transferred to the GRAT. Hence, the present value of the remainder interest, and the taxable gift, is valued at zero. This is known as a “zeroed out” GRAT.
Through the use of a GRAT, a client can take advantage of the low applicable IRS interest rate at the time of the gift with the hope (and expectation) that the assets in the GRAT will outperform the IRS interest rate. To the extent that such a result occurs, the excess value becomes, in effect, a tax free gift to the remainder beneficiaries of the GRAT. On the other hand, if – for any reason – the assets in the GRAT fail to outperform the IRS interest rate, there is no downside to the donor and the donor will essentially end up in the same position as if he or she had not created the GRAT in the first place.
To view an illustration of how a GRAT works, click here.
IRS Postpones Due Date for Filing of Gift Tax and Estate and Trust Income Tax Returns and for Payment of Tax
The Internal Revenue Service (IRS) has announced that the due date for filing Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, and making payments of federal gift and generation-skipping transfer tax is automatically postponed to July 15, 2020. Notice 2020-20 provides this automatic relief to taxpayers who made gifts in 2019. Without the relief, the Form 709 would need to be filed and the tax paid by April 15, 2020. No interest or penalties will be imposed during the postponement period. A taxpayer may choose to file Form 8892, Application for Automatic Extension of Time to File Form 709 and/or Payment of Gift/Generation-Skipping Transfer Tax, by July 15, 2020 in order to obtain an extension of time to file Form 709 to October 15, 2020. However, the gift and/or generation-skipping
tax will still be due by July 15, 2020.
The IRS had previously announced that the due date for filing federal income tax returns and making federal income tax payments for individuals for the 2019 taxable year was automatically postponed from April 15, 2020 to July 15, 2020. There is no limitation on the amount of payment that may be postponed. In Notice 2020-18, the IRS made clear that the postponement for filing federal income tax returns and making federal income tax payments for the 2019 taxable year also applies to trusts, estates, partnerships, associations, companies and corporations.
So far the IRS has not extended the time for filing a Form 706, Federal Estate (and Generation-Skipping Transfer) Tax Return . Form 706 is due nine months after the date of death of a decedent. An automatic six month extension of time to file Form 706 may be obtained by filing Form 4768, Application for
Extension of Time to File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Tax.
We continue to look for opportunities that will benefit Vorys’ trust and estate clients during these turbulent times. If you would like to further discuss the matters above, please contact your Vorys attorney.