What the various wealth transfer tax proposals mean for GRATS

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Grantor retained annuity trusts (GRATs) have always been a reliable wealth transfer financial instrument that can minimize gift and estate taxes. However, the various tax proposals would affect high net worth individuals in more ways than one. It is important to know how these proposals will affect your clients and understand what should be done to protect their assets.

What makes GRATs so attractive to the wealthy is they can allow for passing significant wealth without gift or estate tax liability.  GRATS may be an important part of a Premium Finance exit strategy as it allows assets to efficiently pass to the client's trust that could be used by the trustee to retire or manage the premium finance loan. Let's explore the implications of the newest wealth transfer tax proposals and the best exit strategies, one of which includes premium financing. 

The tax proposals

Early in 2021, the Biden administration proposed two tax increases on accumulated wealth, one of which was to add 61% tax on the wealth of high-earning taxpayers. The tax changes are part of the American Families Plan (AFP), which became law in March 2021. While the AFP is a long and comprehensive law, there are a few parts of it specifically that are important for wealth management professionals to understand.


Previously, the long-term capital gains of high-net-worth individuals were subject to a 20% tax rate. Then, when the gains were sold, they were subject to the 3.8% net investment income tax (NIIT). Now, because of the AFP, the unrealized (unsold) capital gains worth more than $1 million would be taxed at death.

In addition to this unrealized capital gains tax, the plan taxes capital gains of millionaires at the regular income tax rates. This means that they would be levied at the proposed top marginal rate of 39.6%. When combined with NIIT and a 3.8% Medicare surtax, the wealthiest people in America would pay a 43.4% tax rate.

For the 99.5% Act

The bill called "For the 99.5% Act'' would seriously impact estate planning if it passes, especially as it relates to gift tax laws, which is one of the primary uses of a GRAT. One of the goals of the act is to raise money – a projected $430 billion by 2031. While there are many different ways that the act would change wealth management for high-net-worth individuals, there are a few key altercations to take note of as it relates to annuity trusts.

Implications for wealth transfer and GRATs

Under the 99.5% Act, the gift and estate tax rates would increase from 40% to a 65% top rate. Most notably, the act would completely eradicate the short-term GRAT. In addition, there would be no grandfather clause for trusts that already exist.

As for long-term GRATs, the minimum term would be 10 years and would still be taxed as a gift if the property is worth more than $500,000 or 25% of the fair market value of the property.  Existing GRATs would not be taxed, as long as no more contributions or assets were added.

What are some other requirements that may come to fruition under the newest wealth transfer tax proposals? The existence of a zeroed-out GRAT (AKA a Walton GRAT), which allows the grantor to avoid gift taxes while still transferring annuity, would not exist.

Estate planners and wealth managers should take note of the fact that Grantor Trust estate planning is greatly impacted by the act. This means that income tax would no longer be protected through irrevocable trusts and trust assets would have to be included in the grantor's estate and be federally taxed.

The proposed tax law change would start in 2022 and may reduce the annual gift exclusion, which is important to keep in mind. The reduction has the potential to change to $10,000/year per recipient. In addition, it limits the donor to $20,000 total in annual exclusion gifts.

Plan Ahead

Premium financing can be a very efficient way for clients to pay life insurance premiums as clients generally only pay the interest on the loan. However, for certain clients, premium financed life insurance combined with a GRAT could be a highly efficient transfer wealth transfer as the GRAT may provide effective risk mitigation for the loan.

Oftentimes, a GRAT is a strategy within itself and is an option to transfer assets/wealth, but it is important to remember that the benefits of GRATs would change dramatically in the next few years if the proposals came to fruition.

Nothing is set in stone as of yet, but serious moves are being made in the United States that will have lasting repercussions on the way the wealthy are able to transfer their assets. According to the analytics company Cerulli Associates, it is estimated that almost 45 million U.S. households will transfer $68 trillion over the next 25 years. With the addition of these restrictions, the way they do so will have to change.

As the industry leader in providing cutting-edge leveraged solutions, Global Financial Distributors' team of experts can help you develop powerful premium finance strategies for your clients. Reach out today regarding the right solution for you.