If you have been very successful from a financial standpoint, there are many benefits, but there is one potential challenge. We have a federal estate tax in the United States, and it packs a wallop with its considerable 40 percent maximum rate.
The good news is that there is a rather high credit or exclusion. This is the amount that can be transferred before the tax would kick in. In 2022, the federal estate tax exclusion is $12.06 million, and you will see a somewhat larger figure next year when an inflation adjustment is added.
There is also a state-level estate tax to contend with here in Connecticut, and the exclusion is $9.1 million in 2022.
There is an estate tax marital deduction you can use to transfer any amount of money or property to your spouse tax-free as long as you are married to an American citizen.
It is also worthwhile to note that the federal estate tax exclusion is portable, so a surviving spouse can use the exclusion that was allotted to their deceased spouse. The Connecticut estate tax exclusion is not portable.
You cannot simply give large gifts to loved ones while you are living to avoid the estate tax, because there is a federal gift tax that is unified with the death tax. The exclusion is a unified exclusion that includes lifetime gifts along with your estate.
We also have a state-level gift tax in Connecticut. There are 12 states with state estate taxes, and Connecticut is the only one of them that has a gift tax.
Zeroed-Out Grantor Retained Annuity Trust
Now that we have set the stage appropriately, we can move on to an explanation of the zeroed-out grantor retained annuity trust or GRAT. The way that it works is you fund the trust with assets that you expect to appreciate considerably over time, and you name a beneficiary.
The beneficiary would assume ownership of assets that may remain in the trust, and this would technically constitute a taxable gift. You arrange to take annual distributions from the trust for a prescribed period of time.
Since a taxable gift may be given, the Internal Revenue Service accounts for this by applying the Section 7520 rate (this is sometimes called the hurdle rate) to the taxable value of the trust.
The idea is to “zero out” the grantor retained annuity trust. To do this, you arrange for the distributions to be equal to the entire taxable value of the trust, including this extra percentage to account for anticipated interest.
If the assets appreciate at a rate that exceeds the hurdle rate, there will be something left in the trust when you are done taking all the distributions. The remainder would be transferred to the beneficiary in a tax-free manner.
There have been very low interest rates over recent years to make this strategy very attractive. Since they are inching upward, you may want to consider implementing this strategy sooner rather than later.
Attend a Complimentary Seminar
We conduct seminars on an ongoing basis that cover many important estate planning topics. They are held at convenient, comfortable locations in and around Hartford, so this is a convenient way to build on your knowledge.
These sessions offered are complimentary, so this is a great way to invest some spare time. To see the schedule and obtain registration information, visit our estate planning seminar page.
Schedule a Consultation!
We know that it can be disconcerting to discuss personal matters with someone that you have just met, but you can put those concerns aside. Our attorneys go the extra mile to put our clients at ease, and you can rest assured that you will feel comfortable from the start.
You can schedule a consultation at our estate planning offices in Westport or Glastonbury, CT if you call us at 860-548-1000. If you would rather send us a message, fill out our contact form and will be back in touch with you promptly.
Mr. Florin is admitted to practice before the courts of the State of Connecticut and the State of New York. He is also a member of the American Academy of Estate Planning Attorneys, the National Academy of Elder Law Attorneys, the Connecticut Bar Association, and the Fairfield County Bar Association.