Using GRATs Prior to the Effective Date of the 2704 Proposed Regulations

WealthManagement.com
Aug 16, 2016

Martin M. Shenkman 

On Aug. 4, the Treasury Department issued proposed regulations (the regulations)
that restrict or eliminate valuation discounts for family-owned businesses under
Internal Revenue Code Section 2704. The regulations will be the subject of a public
hearing on Dec. 1, 2016 and will become effective 30 days after publication as final
regulations. While many commentators hope that at least some of the harsh
provisions in the regulations will be modified before becoming final, can clients
afford that risk? For many family business owners, the potential loss of discounts
could prove devastating to estate planning (although some commentators have
suggested otherwise). For situations in which discounts could be critical, or even
important, practitioners should guide clients in evaluating implementing planning
prior to the effective date of the regulations. One likely planning technique to be
considered for those client situations that might benefit from advance planning is a
grantor retained annuity trust (GRAT). But should a GRAT be applied in the
traditional manner, or might variations be preferable in light of the GRAT

• A low interest rate environment (that is, a low IRC Section 7520 rate) would
increase the probability of success for a GRAT. The current 1.4 percent rate is a
very low threshold to exceed and thereby makes GRATs useful from that
perspective.
• It’s possible there will be a loss of discounts after year end or shortly thereafter
when the regulations are anticipated to become effective.
• It’s possible that a new administration will pass tax legislation.

Read his commentary here.