House Passes Bill to Require 10-Year Minimum Term for GRATs

On March 24, 2010, the House of Representatives passed the Small Business and Infrastructure Jobs Tax Act of 2010 (H.R. 4849) (the “Act”).

The Act, if adopted by the Senate and signed into law by the President, would require grantor retained annuity trusts (“GRATs”) to have a minimum term of ten years. Clients who are interested in creating one or more GRATs with a term of less than ten years should, therefore, act promptly in order to establish the GRATs prior to the enactment of final legislation.

As discussed in our previous Alert Memos, a GRAT is a trust that permits a donor to transfer appreciation on assets to children (or other beneficiaries) without the imposition of a gift tax if the assets appreciate at a rate in excess of a benchmark Treasury rate. Short-term GRATs are preferable to long-term GRATs in certain circumstances. In particular, because a GRAT will not achieve the intended tax savings if the donor dies during the GRAT term, older clients generally enter into short-term GRATs rather than long-term GRATs. Further, a short-term GRAT is preferable for volatile assets, since a GRAT may be unsuccessful if the assets underperform in any one year. Please see our Alert Memos dated November 19, 2008 and June 29, 2009 for a more detailed discussion of GRATs and a comparison of short-term versus long-term GRATs.

Clients who wish to establish a GRAT with a term of less than ten years should call one of the attorneys in our Private Clients and Charitable Organizations Practice Group.