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GRAT vs. PDT-Battle of the Acronyms

Folks, welcome to the battle of the acronyms. Over the next several months, I offer you a rare opportunity - the inside scoop. Put down the local sports section and let me help you increase your odds of selecting a real winner.

In the far corner, allow me to introduce GRAT. He's tried and true - sanctioned by Congress and (mostly by) the fiscal referees (the IRS) so he is the lead contender. But, did he sell his soul for those blessings?

GRAT fights with his left hand tied behind his back, constrained by the very authority that created him. But, GRAT has a special secret weapon virtually guaranteed to please his audience. Will this weapon compensate for his deficiencies? Excitement mounts as the crowd roars its approval.

In the near corner, we have PDT, a virtually unparalleled fighter with the strength of a lion, combined with grace, elegance and flexibility. She fights using a variety of principles scattered throughout the rule book, yet nothing gives specific assurance that she can win. She is not sanctioned, or even really recognized, by the referees.

So, at least in some wags minds, PDT's irresistibility is marred by some hidden, potentially devastating deficiencies if she s attacked. Note the crowd's standing ovation, punctuated by a few boos.

Let's go behind the scenes and investigate the fighters. Certainly, we'll talk about the strengths and weaknesses of the rules by which they play. We'll also dig deeper and understand the money trail, which might be critical to your ability to make a fully informed decision on where to place your bets.

Perhaps the threshold issue is whether you should play the game. Should you place a bet on either high-stakes contestant?

Prerequisites

To even consider doing so, you must fulfill the following prerequisites:

 

  • Demonstrate basic savvy and commitment by having implemented a well-considered testamentary plan (aka, last will and testament) and related documents;
  • Have a net worth greater than a few million dollars There's no point in playing this game if the house (the U.S. Treasury) won't payoff your winnings (through reduced taxes);
  • Comfortably and happily use your annual gift exclusions, religiously, every year for every heir and have a commitment to directly paying all your heirs medical and educational expenses If you aren't doing the basics, you have no business betting in the bigger leagues;
  • Be reasonably and realistically confident in your financial future so that you are willing to part with enough dough or other wealth to warrant incurring the costs to play the game;
  • Be open to understanding that it just might be possible to transfer wealth in the general direction of (I didn't say to ) your heirs without ruining their work ethic and moral values; and
  • Don't be such a tight wad that you risk loosing just to avoid paying a small token of your affection to competent advisors.

If you don't understand or meet any or all of the above, you have a great deal of catching up to do and I suggest that you grab a cup of coffee and start perusing The Family Business Advisor's electronic database for articles to gain the important understandings to proceed to the match's first round. Try my column, A Framework for Estate Planning in the November and December 2004 editions.

Let s start the fight. . .

Introducing GRAT

Grantor Retained Annuity Trust (aka GRAT ) was born as a trust. Under its terms, the creator ( grantor ) retains the right to an annual payment over a stated number of years (an annuity ). The remainder passes to other family members or continues in trust for their benefit. The latter point is helpful for those of you concerned with damaging your heirs work ethic and social values.

At inception, you make a taxable gift equal to the difference between a) the value of the property contributed to the GRAT and b) the present value of the retained annuity. If the annuity is increased in length and/or amount, its present value is increased and the net taxable gift value is reduced. The annuity can be paid with cash or property. Whatever is left after the annuity is satisfied passes to the family members with no further gift tax consequence.

Sorry, we must pause for a commercial break. So, here's the game plan. Next month, I will start to give you insights from behind the scenes on the contestants both the good and the bad including some things that even many experts don't tell you. When that is done, I will give you the insights to directly compare the two contestants. Please retain this scorecard you might need to refer back to it as the fight progresses.

Ross Nager is Senior Managing Director
Sentinel Trust Company of Houston, Texas

 

 

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