Albuquerque Grantor Retained Annuity Trust Lawyer

A grantor-retained annuity trust (GRAT) provides a unique strategy for creating tax savings by locking in the estimated value of a trust’s remainder balance while interest rates are low. If the assets in the trust are able to grow faster than the estimated rate, then the excess value may be transferred tax-free.

Creating a grantor-retained annuity trust can be an excellent opportunity for families looking to reduce income taxes and transfer taxes levied on beneficiaries. However, the trust has to be formed during the grantor’s lifetime, and it reverts to their estate if the grantor dies before the trust term expires — so there is an element of risk.

Referring to an Albuquerque grantor-retained annuity trust lawyer is the best strategy for calculating your plan’s level of risk and balancing it with the most beneficial opportunities available. You can even establish a series of “rolling GRATs” to reduce the risk that you unexpectedly pass while a substantially funded GRAT is still active.

Find out more about how to use this unique wealth-building and tax-saving strategy during a no-obligation consultation at New Mexico Financial & Family Law. Schedule your consultation today when you call us at (505) 503-1637 or contact us online.

Benefits of Working With an Experienced Albuquerque Grantor Retained Annuity Trust Attorney

Forming an Albuquerque grantor-retained annuity trust is a complicated process, and there are lots of critical decisions to make. Unlike a typical trust, a grantor-retained annuity trust is specifically created with a prediction of the trust’s appreciated value in mind.

The wrong decisions concerning timing and the assets used to fund the trust could negate the intended benefits. Not only that, but they may even add to your costs, compared to simply investing in assets and transferring them directly to your intended beneficiaries.

At the same time, the right decisions could lead to substantial returns. Families could save quite a bit on taxes, especially for transfers involving highly appreciable assets.

There is a substantial opportunity for the right asset portfolio to reap sizeable returns through a GRAT.

Working with an experienced Albuquerque grantor-retained annuity trust enables you to understand what you need to do to maximize your chances of obtaining a net positive benefit. Your lawyer can help you out with major decisions like the following:

• Setting up the legal arrangements for the trust
• Preparing for tax arrangements for any income distributed to you as the grantor
• Timing the Sec. 7520 rate selection to obtain the most advantageous position possible
• Selecting beneficiaries and dividing their shares of the remainder interest
• Determining the optimal schedule of annuity payments to send to yourself, so as to maximize the chances of a net-positive return on the remainder, compared to the Sec. 7520 estimated return
• Coordinating the GRAT with your other investments and key components of your estate plan
• Informing beneficiaries of their right to receive a distribution from the remainder balance once the trust’s term ends
• Preparing for contingency scenarios, including the event that you unexpectedly pass before the trust term expires
• Helping you anticipate all other responsibilities, including if you serve as trustee of your own GRAT

As you can see, there are many key steps and choices involved in the creation of your GRAT. New Mexico Financial & Family Law can provide you with comprehensive support throughout the entire process, including after the trust has begun. Working with us can make the entire process easier and make it less likely to encounter avoidable problems, affording you greater peace of mind.

How Does an Albuquerque Grantor Retained Annuity Trust Work?

A grantor-retained annuity trust uses a specialized strategy that takes advantage of the fact that the annual rate of return for these trusts is calculated in advance, at the time the trust is funded.

Grantors essentially “lock in” the level of returns they can expect, using the applicable IRS Sec. 7520 rate. Even if the assets beat this “hurdle” rate of return, there may not be any additional taxes owed.

How a Typical Trust Works

All trusts follow the same general ownership arrangement:

• A grantor transfers their ownership of chosen assets into the trust, which becomes the new legal owner
• A trustee assumes control over the contents of the trust; for a GRAT, the grantor is allowed to serve as sole trustee or co-trustee, unlike some other forms of specialized trusts, where the trustee must be a non-interested third party
• Beneficiaries receive payments from the trust; in the case of a GRAT, the grantor is the sole beneficiary for the “lead” annuity payments, and then other beneficiaries may split the remainder balance when the trust’s term ends

Special Rules for an Albuquerque Grantor Retained Annuity Trust

In addition to the regular trust elements mentioned above, a GRAT has a few special characteristics:

• The trust is irrevocable, meaning it cannot be significantly altered or dissolved before its term expires
• The grantor will receive an annuity payment at least once a year; the value of this payment is locked in when the trust is created, and it cannot be changed (although the grantor can elect to lock in annuities at an increasing rate of up to +20% each year)
• The trust will last for a set number of years; usually, the term is for around 3 – 10 years, which is long enough for assets to appreciate but not long enough to create a significant risk of the grantor passing before the term expires
• If the grantor does pass before the trust was supposed to end, the remainder balance of the trust automatically reverts to their estate, and there may be additional income taxes and other taxes owed as a result
• The grantor retains legal responsibility for reporting the trust’s income and paying taxes on it every year
• When the term of the trust expires, the beneficiaries will be able to divide up the remainder, according to the ratio that was determined when the trust was formed
• Beneficiaries only pay gift taxes on their portion of income that was received, and they only pay as much gift tax as was originally assessed when the trust was formed, which was based on the hurdle rate — but if the grantor has enough of their lifetime gift tax exemption remaining, these transfer taxes are not assessed
• Any excess appreciation beyond what the hurdle rate estimated is claimed tax-free; also, the grantor’s tax payments on trust income do not count as a gift, resulting in low (or, often, no) taxes imposed upon the beneficiary

The Importance of Beating the Sec. 7520 Hurdle Rate, With Examples

The Sec. 7520 interest rate, which is set by the IRS, is the single most important component of a GRAT. Grantors will want to fund the trust with assets that are likely to appreciate beyond this rate. If their predicted level of returns is achieved, then the GRAT allows their beneficiaries to avoid significant gift taxes.

To illustrate how this might work, we will take the current IRS Sec. 7520 rate, as of the time of writing this page: 5.36%. Importantly, the grantor can also choose to instead use one of the rates from the preceding two months. Since January 2025’s rate was slightly lower at 5.1%, it would make more sense to use that rate, instead.

Now, let’s say the grantor funds the trust with a mix of assets that is likely to appreciate at a rate of at least 8%. Note that a GRAT can contain nearly any asset that an individual can own, such as publicly traded stocks, bonds, mutual funds, etc. as well as privately owned property, like closely held company shares (even potentially S-corporation shares, unlike many trusts) or real estate.

The grantor is then expected to pre-calculate the estimated portion of income that will be gifted to beneficiaries, compounded annually, using the Sec. 7520 rate.

Example Difference in Cumulative Appreciation of GRAT Between Sec. 7520 Rate and Actual Rate of 8%

Let’s say the grantor funds the trust with $2 million, and they intend to take out $180,000 each year for 10 years. This arrangement leaves beneficiaries with a $200,000 remainder from the principal, plus an estimated $814,33 of predetermined (and now locked in) interest, equaling $1,014,333 total.

However, with an actual predicted return of 8%, the total appreciated value of the trust remainder could add up to $1,710,269 total. That’s over $1.5 million of actual earned interest, at a difference of nearly $700,000 from the estimated Sec. 7520 rate.

In this case, where the grantor is able to hit exactly 8% returns every year, their beneficiaries save quite a bit on taxes, avoiding gift taxes entirely on the $695,936 difference between their actual gift versus their estimated gift.

Increasing Returns With a 20% Graduated Annuity Rate

Another feature of GRATs is that the grantor is allowed to increase their annuity payment by up to 20% each year.

With this arrangement, they can start with smaller annuities, giving the trust the potential to obtain greater growth in its first few years. Then, over time, they withdraw even more of the principal, and even some of the interest, which can result in higher net savings for the beneficiary.

Example Difference in Final Beneficiary Gift for GRAT With 20% Increasing Annuities

In this example, the grantor starts off with a smaller annuity of $70,000, gradually increasing it by 20% each year. In the end, they retrieve nearly the same amount as the above example: about $1.8 million.

However, because they gave the principal more room to grow initially, the beneficiaries end up with even better overall returns. In this example case, beneficiaries are saving slightly less than they would have in avoided gift assessments ($631,541) compared to a static annuity, but the amount they are able to receive at the end of the trust’s term has grown significantly.

Maximizing Gift Tax Deductions With a “Zeroed-Out” GRAT

If grantors want to get even more ambitious, they can aim to take enough in annuities each year to essentially leave a near-zero balance in the trust — at least as far as the Sec. 7520 rate is concerned.

Example Difference in Final Beneficiary Gift for Zeroed-Out GRAT

With this strategy, beneficiaries pay nearly zero in gift taxes, period. However, as you can see, the value of their final distribution has also decreased significantly. Nevertheless, they can take comfort in the fact that very little of their distribution will be reduced by gift taxes.

Whether the advantages of the final result are worth it depends on the grantor’s final goals:

• With a static annuity that doesn’t add up beyond the principal, beneficiaries achieve the greatest net benefit in gift tax savings.
• With a 20% graduated annuity that eats into the trust’s growth, the beneficiaries ultimately take home more, albeit perhaps at a slight penalty to their net gift tax savings.
• With a zeroed-out GRAT, the growth potential of the trust is significantly hampered, albeit with the end result boon of the beneficiary owing almost $0 in gift taxes.

The Grantor’s Tax Payment for Interest in an Albuquerque GRAT Does Not Count as a Gift

One final important thing to note is that beneficiaries can expect to receive their remainder distributions largely (or completely) free of any income taxes because the grantor will already have paid these on their annual tax returns. Interestingly, this generous person-to-person tax subsidy does not trigger any additional gift taxes, even if the cumulative taxes covered by the grantor add up to quite a bit.

This non-taxable “gift” is another advantage of starting an Albuquerque grantor retained annuity trust — one that is often overlooked.

Develop a Strategy for Funding and Starting Your Albuquerque Grantor Retained Annuity Trust Law Firm

Admittedly, the examples above show relatively modest tax savings obtained through using a GRAT. That’s because it uses a current Sec. 7520 rate is somewhat high, at least compared to what it was a few years ago.

Nevertheless, there are clear-cut advantages on display. While the U.S. Federal Reserve has implemented several rate increases since its historic lows during 2020-2022, the height of the COVID-19 pandemic, rates are still relatively low, historically speaking.

Rates could also decrease in the near future if the U.S. Federal Reserve cuts its interest rate, which would affect the Sec. 7520 rate as well.

Additionally, you could always choose to fund your GRAT with assets that are likely to appreciate more than our example rate of 8%. Of course, the more volatile the assets, the riskier it is to estimate their final value.

If your annuity plan intends to “eat into” the principal funding amount of your trust, then the risk that you could “overdraw” and have to terminate payments early is all the greater.

Therefore, strategically forming your GRAT depends on both good timing — choosing a Sec. 7520 rate that’s advantageously low — along with smart funding, which means choosing assets that are very likely to appreciate beyond the hurdle rate.

You can work with an experienced Albuquerque trust law firm to select the ideal strategy for you, depending on your appetite for risk compared to the opportunity for meaningful gift tax savings.

Get started planning when you call us at (505) 503-1637, or contact us online to schedule a confidential, no-obligation consultation.