A grantor retained annuity trust (GRAT) is a type of trust into which an individual transfers property while retaining an annuity interest for a specified term. At the term’s end, the property passes to the child or beneficiary. And if the present value of the remainder interest is virtually nothing, there is no gift tax consequence.
A Treasury explanation of the President’s fiscal year 2014 budget (which would crack down on such “zeroed out” GRATS) observes that “taxpayers have become adept at maximizing the benefit of this technique, often by minimizing the term of the GRAT (thus reducing the risk of the grantor’s death during the term), in many cases to two years, and by retaining annuity interests significant enough to reduce the gift tax value of the remainder interest to zero or to a number small enough to generate only a minimal gift tax liability.”
Present low interest rates and the recent surge in investment market returns have made GRATS particularly attractive, but if Obama has his way, things might change.