Transferring Company Value to the Next Generation
Posted 5-27-2009 | By Jim Redpath | Download Article
As seen in Minnesota Business Experts' Forum
With current Internal Revenue Service (IRS) interest rates so low, it may be time to consider setting up a Grantor Retained Annuity Trust (GRAT).
GRATs offer a very efficient way to transfer ownership of a privately owned company or investments to the next generation, saving the family estate and gift taxes. GRATs may appear too good to be true, especially right now with such low interest rates.
However, when set up correctly and efficiently, they are a valuable tool for business owners of S-Corporations, Partnerships or LLCs, and their family members.
GRATs are used to transfer income-producing or appreciating assets to minimize estate taxes and may save probate costs and protect assets against the claims of creditors.
A GRAT is created by transferring assets (closely held companies or investments) to an irrevocable trust and retaining the right to an annuity payment for a fixed term of years, expressed as a fixed percentage of the original value of the assets transferred to the trust. When the annuity payment period ends, assets in the trust go to the beneficiaries of the trust.
The best candidates for a GRAT are business owners with the following:
- An S-Corporation, Partnership or LLC
- A profitable company
- A company paying taxes
- The desire to transfer stock to the next generation
- A situation where a sale of the company is imminent
- Comfort with current financial means to live as they wish moving forward.
Advantages of a GRAT:
- Assets are moved out of the estate
- Transaction is not subject to gift tax
- Estate taxes are substantially reduced
- Company owners do not give up control or many of the financial rewards of the company
- Flexibility in structuring future ownership
- Income tax and other distributions on flow-through entity ownership interests transferred to the GRAT can be used to pay the GRAT payments.
Disadvantages of a GRAT:
- Grantor must outlive the term of the GRAT to receive the anticipated gift and estate tax benefits
- IRS could challenge the value of the stock. This is especially true if the assets are sold shortly after the gift to the GRAT and a lower value is used or if the discounts are excessive. This would result in increasing the annuity payment, which results in a reduction of the assets transferred to the beneficiaries.
Please contact Jim Redpath, CPA, CEO of HLB Tautges Redpath, Ltd. at jredpath@hlbtr.com or 651-426-7000 if you’re interested in learning more about the benefits of GRATs to individuals and beneficiaries.
JIM REDPATH
CEO
HLB Tautges
Redpath, Ltd.
jredpath@hlbtr.com