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Estate planning tools: Using the GRAT as a tax shelter

An accidental loophole in American estate planning legislation could help the nation's richest citizens avoid billions of dollars in taxes. Billionaires in Florida are often required to pay outrageous 40 percent estate or gift taxes on their assets. Now, though, a newly popular type of trust is providing a critical tax shield that could have preserved about $100 billion in wealth since the year 2000. This important estate planning tool has been called a "mockery of the tax code," but it is benefiting scores of wealthy Americans who are committed to smart estate planning.

Politicians have been attempting to close the loophole since 2009, but they have not succeeded. The wealthy Americans are using provisions related to the grantor retained annuity trust, or GRAT. The GRAT is a useful estate planning tool that allows wealthy Americans to transfer millions to their beneficiaries without paying estate tax or other penalties. In fact, the GRAT was created in response to another type of trust that had been characterized as abusive to the tax code.

GRAT investments are unique because they stipulate that the grantor intends to return the assets contained within the trust to himself or herself after a two-year period. In essence, the person is giving a gift to himself. If the trust makes financial gains, that money can be given to beneficiaries tax-free. If the trust loses, only a few thousand dollars are sacrificed to maintain the trust. Even corporate investors can use GRATs to protect their assets, with corporate stock options approved for placement in such trusts.

Although Americans may not entirely refuse to pay relevant taxes on their estates, there are ways to maneuver within the tax code to preserve personal property from being affected by federal and state gift tax. A qualified tax and probate attorney may be able to provide more information on tax shelters such as the GRAT system, allowing Floridians to preserve more of their wealth for their family members and avoid unfair tax liability.

Source: Bloomberg News, "Accidental tax break saves wealthiest Americans $100B" Zachary R. Mider, Dec. 29, 2013

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