Tax, Trusts & Estates Law Monitor : Estate Planning Lawyer & Attorney : Cole Schotz Meisel Forman & Leonard Law Firm : NJ, Mid-Atlantic Gift Tax & Trust Issues

On June 28, 2011, the Senate introduced Senate Bill 1286 (known as the Trade Adjustment Assistance Extension Act of 2011), which contains the same GRAT restrictions that were introduced in numerous bills in the House of Representatives and Senate in 2010.  The comprehensive 2010 tax act enacted in December 2010 did not include any GRAT restrictions.  Thus, in 2011, the use of GRATs has not been curtailed or restricted.

The new Senate bill provides that (i) GRATs must have a minimum 10 year term and (ii) the remainder interest of the beneficiaries of a GRAT at the time of the transfer must have a value greater than zero.  If enacted, the bill would prohibit “zeroed-out GRATs,” that is, GRATs where the full value of the assets contributed by the Grantor will be paid back to the Grantor in the form of an annuity so that the remainder interest will have a value of zero.  No guidance has been offered to provide what the minimum value of the remainder interest must be.  One other restriction of note:  the annuity payment itself cannot be reduced year-to-year during the 10 year term.  Without this restriction, it may have been possible to create the economic equivalent of a short term GRAT.

For those people who are interested in short term GRATs, now may be the time to accelerate the implementation of them if you believe the GRAT restrictions will become law.

It is unclear what the effective date of Senate Bill 1286 would be.  The bill provides that amendments made under the section of the bill restricting GRATS would apply retroactively to transfers made after December 31, 2010 but the same GRAT restrictions set forth in the Administration’s 2012 revenue proposals provide that the proposal would apply to trusts created after the date of the enactment of the bill.

We will keep you apprised of the developments of this legislation.

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This week, the Senate considered the House’s version of the Small Business Jobs Tax Relief Act of 2010. Going into the hearings, there was considerable speculation that the Senate was going to pass its bill with the GRAT restrictions in place, meaning the minimum term for GRATs would be 10 years, and the remainder interests of any GRATs would have to have a value greater than zero.

The speculation was incorrect. The Senate’s version of the House Bill currently does not contain the GRAT restrictions, so for now, short term GRATs remain a viable technique. The House bill and the Senate version of the bill will ultimately have to reconciled. It is unclear whether the GRAT restrictions will be included. Thus, if you are planning to implement a short term GRAT, it is advisable to do it as soon as possible due to the uncertainty of the legislation.

We will continue to advise you on GRAT legislation as it happens.
 

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On December 3, the House of Representatives by a vote of 225 to 200 passed an estate tax bill which makes the $3.5 million applicable exclusion amount and the 45% estate tax rate permanent. Every Republican, along with 26 Democrats, voted no on the bill. If a law is not passed by December 31, the estate tax will be repealed for one year, and in 2011, the estate tax will return with a $1 million exemption (subject to inflation) and a top estate tax rate of 55%. The Senate is not expected to adopt this bill; it is more likely to pass a one year extension of the current law. We will keep you posted on all developments as they unfold.

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