New Mexico Grantor Retained Annuity Trust Lawyer

A grantor-retained annuity trust (GRAT) offers a way for an individual to gift the interest earned from assets to loved ones with significant gift tax savings. Best of all, the principal value of the trust will likely find its way back to the trust creator (called the grantor), meaning that the money they invested will end up back in their pocket once the term period for the trust has expired.

Thanks to these benefits — and many others we have yet to mention — a grantor-retained annuity trust offers a sound financial vehicle for individuals looking to pass wealth onto families with minimal tax liabilities. They are especially tempting for individuals who want to invest or will soon invest in highly appreciable assets, including IPO stocks, certain real estate deals, or an aggressive stock portfolio strategy.

When you come to New Mexico Financial & Family Law, we’ll help you review your financial positions, consider your future goals in detail, and go over options that include a GRAT, selecting the perfect range of estate planning vehicles to maximize your chances of achieving your goals for the future.

Schedule a no-obligation case review with a grantor-retained annuity trust lawyer near you when you call us today at 505-503-1637 or contact us online.

Benefits of Working With a New Mexico Grantor Retained Annuity Trust Attorney

The way a grantor-retained annuity trust is set up has a tremendous effect on its ability to produce the intended outcome for the trust creator. Some of the most important decisions include:

• The timing of the trust’s creation — One key aspect of a GRAT is its ability to gain enough appreciation in value to beat the current §7502 interest rate set by the IRS, which determines the gift tax amount based on the trust’s calculated remainder interest.
• The amount and schedule of the annuity — The final total value of annuity payments made from the GRAT is another critical component since they must equal the principal value used to fund the trust by the end of the trust’s duration.
• The term set for the trust’s lifespan — A GRAT’s term should be set to a time period that sufficiently allows the assets to gain measurable appreciation, but it should also not last so long that the trust creator is likely to pass on before all annuities have been distributed (see more in the section “What Happens If the Grantor Dies Before the Annuity Payments Have Finished?” below).
• The assets used to fund the trust — Even more so than with most other types of trusts, the assets placed into trust should be very carefully chosen since they should be volatile enough to have a high chance of beating the “hurdle rate” set by the IRS’s §7502 interest schedule.
• How the trust will be distributed to beneficiaries — When considering instructions for distribution, the grantor should anticipate a wide range of possible outcomes and needs, selecting a method that both provides measurable value to beneficiaries while mitigating the risks of triggering extra taxes (and negating the purpose of the GRAT).
• Who will serve as trustee or co-trustee — You will want to select a reliable trustee while also including provisions to name an alternate in case of unforeseen complications or the death of an individual trustee.

Your financial future hinges on major decisions like these, which is why New Mexico Financial & Family Law is here to provide guidance and create your trust using the most strategic approach possible. From calculating the amount of money to pay in distributions to fine-tuning the scope of language describing how beneficiaries will receive distributions, any small mistake could completely jeopardize the ability of a GRAT to provide its intended purpose.

Our firm has established a reputation for quality service and experienced advice on estate planning, gift planning, tax-advantaged instrument use, and other major aspects of building your financial legacy. You can rely on our New Mexico grantor-retained annuity trust attorneys to provide comprehensive service and sound recommendations through every step of your financial planning.

Reach out to our New Mexico trust attorneys when you are ready to learn more and determine the best way to preserve the financial future of those you care about most.

How Does a Grantor Retained Annuity Trust Work?

Like other trusts, a grantor-retained annuity trust is created by a grantor who funds the trust with assets in their name. The grantor designates a trustee to manage the assets, which can be the same person as the grantor during the grantor’s lifetime.

The trust will eventually pay out money to beneficiaries according to provisions set within the trust.

There are a number of fairly unique aspects to a grantor-retained annuity trust, as well:

• The trust must be irrevocable, meaning it cannot be changed or dissolved after it is funded.
• The trust is structured to pay an annuity to the grantor, which should eventually be up to 100% or more of the initial value of the principal assets used to fund the trust.
• The grantor pays a gift tax on the remainder interest value — what’s left in the trust after all the annuities have been paid — based on the calculated value of the assets at the time the trust is funded.
• The predicted amount of remainder interest value is calculated using the IRS’s current 7502 interest rate, which is often referred to as the “hurdle rate” since you will want your asset appreciation to beat this rate in order to have a value that exceeds the predicted rate, effectively avoiding tax on the excess.
• After the schedule for annuities has been completed, then what remains in the trust (i.e., the remainder interest) will be distributed to beneficiaries, which can be an individual or another irrevocable trust.
• The trust will be designated as a grantor trust, which means all income derived from the appreciation of assets will be counted as income for the grantor and taxed at the appropriate income tax rate.

An Example New Mexico Grantor Retained Annuity Trust

Richard Guy has stock options for a company about to undergo an IPO that has a total current value of $500,000. They are expected to grow many times past that to somewhere in the realm of $5 million within ten years.

If Richard keeps the stocks in his own ownership, he will pay capital gains on the full $4.5 million in appreciation. Not only that, but if he gifts this appreciated value to his relatives after he dies, he will either trigger hefty gift taxes (40%) or eat into his total lifetime exemption amount for gift taxes and estate taxes.

Being a smart fellow, Mr. Guy reaches out to a New Mexico grantor-retained annuity trust law firm. They help him set up a trust that deposits his stock option assets and any other assets he wants to include.

The trust is set to last for a term of 10 years. At the time the trust is funded, the §7502 rate is 4.4%. That means the end value of the assets is calculated as follows:

500,000 x (1 + .044)¹⁰  =  $769,086.15

Mr. Guy then receives annuity payments from the trust, which can equal or exceed the value of the initial $500,000 principal. For the purposes of this example, let’s assume he goes for a simple formulation of $50,000 for ten years.

According to the §7502 rate calculation, this should leave only $269,086.15 in the trust. Since this trust is going to distribute the remainder to a beneficiary, Mr. Guy pays the gift tax rate on this amount.

Now, thanks to their GRAT, Mr. Guy has just legally avoided paying taxes on the remaining actual value of the trust, which is closer to $4.5 million.

As you can see, as long as the assets put in the trust are very likely to appreciate, the GRAT has many advantages to offer for wealthy and well-vested individuals.

What Happens If the Grantor Dies Before the Annuity Payments Have Finished?

Unfortunately, this situation means that the entirety of the trust’s contents convert back to the grantor’s estate. The estate will then pay any applicable taxes in excess of the grantor’s remaining lifetime estate tax exclusion amount.

The risk of a trust “outliving” the grantor is why it is so important to be careful about determining an appropriate number of years for the trust to last. Grantors should ideally create their trust as early as possible when the risk of an unexpected shortening of their lifespan is lower.

They can also, instead, select a shorter term for their GRAT.

Note, too, that you can have multiple GRATs in quick succession. That way, you can allow the assets to appreciate and then roll the remaining value into a new trust.

This strategy is especially beneficial if the current hurdle rate is high but is predicted to go lower in the next few years.

How Long Can the GRAT Last?

Based on case tests that went to trial, the shortest known period a GRAT can last is two years. Also, because of the risk of premature death, grantor-retained annuity trust attorneys in New Mexico typically would not recommend a term period longer than ten years.

However, a GRAT can legally last as long as the likely predicted lifetime of the grantor, so the term can potentially be longer than ten years.

Can the Remainder Interest Amount Be Counted Towards the Grantor’s Lifetime Gift Tax Exclusion?

Unfortunately, no. Because the beneficiaries’ future interest in the trust is not guaranteed, gift taxes can only be paid at the time the trust terminates and the remainder balance is transferred. That means that the “gift” is not given until many years off in the future, and so it cannot count as a present interest and, thereby, cannot count towards the grantor’s remaining gift tax exemption amount.

GRATs Offer Flexibility Since They Remain in the Grantor’s Control

Because the grantor retains partial control and ownership of the trust, grantor-retained annuity trusts are known to be quite flexible. In most cases, the grantor has the option to sell non-liquid assets in the trust to convert them to cash value.

They can then use this cash to purchase other assets, which will remain within the trust.

The ability to reconfigure the portfolio of a trust greatly reduces its financial risks. If, for example, an asset proves to be less appreciable than expected, it can be liquidated or directly exchanged for an asset of equivalent value that is expected to grow at a faster rate.

The grantor can also sell off an asset that has reached its expected maximum appreciation and then purchase a more stable asset in its stead.

Not only that, but cash deposited in a GRAT can be exchanged for non-liquid assets of equivalent value in order to free up money for the grantor to make investments outside of the trust.

What Is a Zeroed-Out Grantor Retained Annuity Trust?

A zeroed-out GRAT provides an alternative for individuals who want to continually protect assets from taxation in exchange for a predicted remainder interest value that can be transferred to beneficiaries.

As its name implies, a zeroed-out GRAT will distribute an amount that is predicted to equal all of the principal and the projected remainder value of the trust. Using this arrangement, the final projected remainder amount is $0, meaning that no gift taxes will be paid at any time.

To return to our Richard Guy example, if Mr. Guy wants to reduce his gift tax burden to zero, he can set his annuity payments to perfectly zero out the total lifetime value projected for the trust. In this case, we’d divide the total principal + projected interest balance of $769086.15 by ten years to equal annuity payments of $76,908.

The projected remainder interest value would then be just $6.15 or so.

What Happens If a New Mexico Grantor Retained Annuity Trust Runs Out of Money Early?

In some cases, assets in a GRAT don’t appreciate as expected. When this happens, the trust is dissolved once it reaches a zero balance, leaving nothing remaining for the expected beneficiary.

Build Greater Wealth With the Help of Our New Mexico Grantor Retained Annuity Trust Law Firm

Thanks to their flexibility, low relative risk, and lack of major trade-offs, grantor-retained annuity trusts are quite popular, especially in periods where the hurdle rate is relatively low.

New Mexico Financial & Family Law can help you take advantage of all of these benefits while preparing for a brighter financial future for you and your loved ones. Find out more and learn how we can get started when you call 505-503-1637 or contact us online to schedule a case review.