A grantor retained annuity trust (GRAT) is an irrevocable trust into which you make a one-time transfer of property and from which you receive a fixed amount annually for a specified number of years (the annuity period)..At the end of the annuity period, the payments to you stop, and any property remaining in the trust passes to the persons you've named in the trust document as the remainder beneficiaries (e.g., your children) or the property can remain in trust for their benefit.
A GRAT is generally used to transfer rapidly appreciating (or high income-producing) property to heirs with the main goal of transferring, free from federal gift tax, a portion of any appreciation in (or income earned by) the trust property during the annuity period.
Because a GRAT is an irrevocable trust, when you transfer property to the GRAT, you're making a taxable gift to the remainder beneficiaries. The value of the gift is discounted because of your retained interest. The amount of the discount is calculated using IRS valuation tables that assume the property in the trust will realize a certain rate of return during the annuity period. This assumed rate of return is known as the Section 7520 rate, discount rate, or hurdle rate. If the property in the trust grows more than the IRS assumed rate of return, any excess growth will pass to the remainder beneficiaries gift tax free.
The catch to this strategy is that you must outlive the annuity period. If you die before the annuity period expires, the value of the property in the trust on the date of your death will be included in your estate for estate tax purposes. This, however, merely puts you in the same position you would have been in had you not used the GRAT (except for the costs to create and maintain the trust). GRATs are typically created with a long term (5, 10, or 20 years), especially when the Section 7520 rate is low. The longer the term, the more growth that can potentially be removed from an estate. However, the longer the term, the greater the risk that you'll die during the trust term and that all of the GRAT assets will end up back in your estate.
What is a rolling GRAT? A spinoff of the GRAT is a strategy known as a "rolling GRAT." A rolling GRAT is actually a series of GRATs with short terms (i.e., 2 to 5
years). For example, say you establish an initial GRAT (GRAT 1) for a term of 2 years. At the end of Year 1, you receive your first annuity payment, and with that payment you fund a second GRAT. When GRAT 1 terminates at the end of Year 2, you take your second annuity payment and fund a third GRAT. Any assets remaining in GRAT 1 are excess returns that are distributed to the beneficiaries. Depending on how the GRAT is initially funded, excess returns on GRAT assets may consist of interest, dividends, and any market increase (appreciation) in the value of the assets. The creation of subsequent GRATs can go on for as long as you want.
The benefits of rolling GRATs
The main purpose of the rolling GRAT is to maximize return and minimize risk. One benefit is that if one GRAT loses money or the growth of trust assets fails to surpass the
Section 7520 rate, you can start over with another GRAT. Rolling GRATs are typically
funded with specific stocks or asset classes. This segregation of assets can be an investment hedge, for example, to help prevent losses, if any, on one stock from offsetting gains on other stocks.
Additionally, you can reduce the risk of having all of the GRAT assets included in your estate because of an early death. If, for example, you die 5 years into an arrangement as described above, any excess returns from 3 of the GRATs would have been removed from your estate. Further, assets from the rolling GRAT strategy are distributed to the beneficiaries earlier than with a long-term GRAT. With a 10-year GRAT, for example, assets are distributed only at the end of the 10-year period. With a series of 2-year rolling GRATs, some assets start to become available to the beneficiaries after the second year.
Finally, you can stop creating the GRATs whenever you want to. For instance, you may
feel that you have gifted enough already or that you need to focus instead on rebuilding your wealth due to poor market performance.
The drawbacks
The use of rolling GRATs assumes that you do not need the annuity payments for other
purposes. Additionally, there is a risk that the Section 7520 rate may increase and keep increasing after the first year. Whereas a long-term GRAT can lock in a low initial Section 7520 rate for the entire GRAT term, rolling GRATs may be subject to fluctuating Section 7520 rates. You'll need an attorney to draft the GRAT
Sunday, June 27, 2010
Friday, June 18, 2010
Managing Cash
How Can I Better Manage My Short-Term Cash?
For the vast majority of people, it is essential to keep a portion of their assets in liquid form in order to meet monthly commitments.
For example, most families have to meet their mortgage or rent payments, grocery, utility, and transportation bills out of their monthly paychecks. There are a host of other expenses that arise from month to month, such as auto insurance, that help keep the pressure on the family cash flow.
If people are fortunate enough to have anything left over once all the expenses have been met, then they can worry about saving or investing for the future.
The paychecks that you deposit in your checking account, which seem to swiftly disappear as you pay monthly expenses, constitute a portion of your short-term cash. The money is no sooner in your bank account than it flows out again as payment for goods and services.
However, because the money that we use to meet our monthly expenses is so liquid, there is a tendency to simply look at it as a method of payment. We often leave more than we need in our checking accounts, gaining little or no interest until we need it for a future expense.
By actively managing the short-term cash that passes through your hands, you can provide a means of saving for the future. You can use this money to increase your net worth with little or no additional risk to your principal.
Short-term investment instruments, such as Treasury bills, certificates of deposit, and money market mutual funds, can provide you with the liquidity needed to meet expected and unexpected expenses and to increase your short-term investment income.
There are numerous alternatives available to enable you to get your short-term cash working for you. The key to successfully managing your short-term cash lies in understanding the alternatives and choosing the one most appropriate to your particular needs and circumstances.
Treasury bills are backed by the full faith and credit of the U.S. government as to the timely payment of principal and interest. Bank CDs are insured up to $250,000 by the FDIC.*
Money market funds are neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although money market funds seek to preserve the value of your investment at $1 per share, it is possible to lose money by investing in money market funds.
Mutual funds are sold only by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
*The $250,000 FDIC deposit insurance coverage limit is temporary and is scheduled to revert back to the $100,000 limit after December 31, 2013.
For the vast majority of people, it is essential to keep a portion of their assets in liquid form in order to meet monthly commitments.
For example, most families have to meet their mortgage or rent payments, grocery, utility, and transportation bills out of their monthly paychecks. There are a host of other expenses that arise from month to month, such as auto insurance, that help keep the pressure on the family cash flow.
If people are fortunate enough to have anything left over once all the expenses have been met, then they can worry about saving or investing for the future.
The paychecks that you deposit in your checking account, which seem to swiftly disappear as you pay monthly expenses, constitute a portion of your short-term cash. The money is no sooner in your bank account than it flows out again as payment for goods and services.
However, because the money that we use to meet our monthly expenses is so liquid, there is a tendency to simply look at it as a method of payment. We often leave more than we need in our checking accounts, gaining little or no interest until we need it for a future expense.
By actively managing the short-term cash that passes through your hands, you can provide a means of saving for the future. You can use this money to increase your net worth with little or no additional risk to your principal.
Short-term investment instruments, such as Treasury bills, certificates of deposit, and money market mutual funds, can provide you with the liquidity needed to meet expected and unexpected expenses and to increase your short-term investment income.
There are numerous alternatives available to enable you to get your short-term cash working for you. The key to successfully managing your short-term cash lies in understanding the alternatives and choosing the one most appropriate to your particular needs and circumstances.
Treasury bills are backed by the full faith and credit of the U.S. government as to the timely payment of principal and interest. Bank CDs are insured up to $250,000 by the FDIC.*
Money market funds are neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although money market funds seek to preserve the value of your investment at $1 per share, it is possible to lose money by investing in money market funds.
Mutual funds are sold only by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
*The $250,000 FDIC deposit insurance coverage limit is temporary and is scheduled to revert back to the $100,000 limit after December 31, 2013.
This material was written and prepared by Emerald.
© 2010 Emerald
© 2010 Emerald
Friday, June 11, 2010
Is having a living trust beneficial?
How Can a Living Trust Help Me Control My Estate?
Living trusts enable you to control the distribution of your estate, and certain trusts may enable you to reduce or avoid many of the taxes and fees that will be imposed upon your death.
A trust is a legal arrangement under which one person, the trustee, controls property given by another person, the trustor, for the benefit of a third person, the beneficiary. When you establish a revocable living trust, you are allowed to be the trustor, the trustee, and the beneficiary of that trust.
When you set up a living trust, you transfer ownership of all the assets you’d like to place in the trust from yourself to the trust. Legally, you no longer own any of the assets in your trust. Your trust now owns your assets. But, as the trustee, you maintain complete control. You can buy or sell as you see fit. You can even give assets away.
Upon your death, assuming that you have transferred all your assets to the revocable trust, there isn’t anything to probate because the assets are held in the trust. Therefore, properly established living trusts completely avoid probate. If you use a living trust, your estate will be available to your heirs upon your death, without any of the delays or expensive court proceedings that accompany the probate process.
There are some trust strategies that serve very specific estate needs. One of the most widely used is a living trust with an A-B provision. An A-B trust enables you to pass on up to double the exemption amount to your heirs free of estate taxes.
When an A-B trust is implemented, two subsequent trusts are created upon the death of the first spouse. The assets will be allocated between the survivor’s trust, or “A” trust, and the decedent’s trust, or “B” trust.
This will create two taxable entities, each of which will be entitled to use a personal exemption.
The surviving spouse retains full control of his or her trust. He or she can also receive income from the deceased spouse’s trust and can even withdraw principal from it when necessary for health, support, or maintenance.
On the death of the second spouse, the assets of both trusts pass directly to the heirs, completely avoiding probate. If each of these trusts contains less than the exemption amount, these assets will pass to the heirs free of federal estate taxes.
The information provided here is to assist you in planning for your future. The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor.
Living trusts enable you to control the distribution of your estate, and certain trusts may enable you to reduce or avoid many of the taxes and fees that will be imposed upon your death.
A trust is a legal arrangement under which one person, the trustee, controls property given by another person, the trustor, for the benefit of a third person, the beneficiary. When you establish a revocable living trust, you are allowed to be the trustor, the trustee, and the beneficiary of that trust.
When you set up a living trust, you transfer ownership of all the assets you’d like to place in the trust from yourself to the trust. Legally, you no longer own any of the assets in your trust. Your trust now owns your assets. But, as the trustee, you maintain complete control. You can buy or sell as you see fit. You can even give assets away.
Upon your death, assuming that you have transferred all your assets to the revocable trust, there isn’t anything to probate because the assets are held in the trust. Therefore, properly established living trusts completely avoid probate. If you use a living trust, your estate will be available to your heirs upon your death, without any of the delays or expensive court proceedings that accompany the probate process.
There are some trust strategies that serve very specific estate needs. One of the most widely used is a living trust with an A-B provision. An A-B trust enables you to pass on up to double the exemption amount to your heirs free of estate taxes.
When an A-B trust is implemented, two subsequent trusts are created upon the death of the first spouse. The assets will be allocated between the survivor’s trust, or “A” trust, and the decedent’s trust, or “B” trust.
This will create two taxable entities, each of which will be entitled to use a personal exemption.
The surviving spouse retains full control of his or her trust. He or she can also receive income from the deceased spouse’s trust and can even withdraw principal from it when necessary for health, support, or maintenance.
On the death of the second spouse, the assets of both trusts pass directly to the heirs, completely avoiding probate. If each of these trusts contains less than the exemption amount, these assets will pass to the heirs free of federal estate taxes.
The information provided here is to assist you in planning for your future. The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor.
This material was written and prepared by Emerald.
© 2010 Emerald
© 2010 Emerald
Friday, June 4, 2010
Looking for a smart way to refinance?
What Are Some Smart Ways to Refinance?
Recently, fixed mortgages were near their lowest rates in almost 30 years. And if you are one of the many people who took out mortgages in the few years prior to that, you may be wondering if you should look into refinancing.
If your mortgage was taken out within the past five years, it may be worthwhile to refinance if you can get financing that is at least one to two points lower than your current interest rate. You should plan on staying in the house long enough to pay off the loan transaction charges (points, title insurance, attorney’s fees, etc.).
A fixed-rate mortgage could be your best bet in a rising interest rate environment, if you plan to stay in the house for several years. An adjustable mortgage may suit you if you will be moving within a few years, but you need to ensure that you will be able to handle increasingly higher payments should interest rates rise.
One way to use mortgage refinancing to your advantage is to take out a new mortgage for the same duration as your old mortgage. The lower interest rate will result in lower monthly payments.
For example, if you took out a $150,000 30-year fixed-rate mortgage at 7.5 percent (including transaction charges), your monthly payment is now $1,049. Refinance at 6 percent with a 30-year fixed-rate mortgage of $150,000 (including transaction fees), and your payment will be $899 per month. That’s a savings of $150 per month, which you can then use to invest, add to your retirement fund, or do with it whatever you please.
Another option is to exchange your old mortgage for a shorter-term loan. Your 30-year fixed-rate payment on a $150,000 loan was $1,049 per month. If you refinance with a 15-year fixed mortgage for $150,000 — including transaction costs — at 6 percent, your monthly payment will be $1,266. This payment is only $217 more than your previous mortgage, but your home will be fully paid for several years sooner, for a savings of more than $150,000! And some banks around the country are beginning to offer 10- and 20-year mortgages.
Either way you look at it, it’s an attractive idea.
If you’re considering refinancing your mortgage, call for an appointment with me at (805) 965-0101 and i can help determine whether refinancing your home would be a good move for you.
Recently, fixed mortgages were near their lowest rates in almost 30 years. And if you are one of the many people who took out mortgages in the few years prior to that, you may be wondering if you should look into refinancing.
If your mortgage was taken out within the past five years, it may be worthwhile to refinance if you can get financing that is at least one to two points lower than your current interest rate. You should plan on staying in the house long enough to pay off the loan transaction charges (points, title insurance, attorney’s fees, etc.).
A fixed-rate mortgage could be your best bet in a rising interest rate environment, if you plan to stay in the house for several years. An adjustable mortgage may suit you if you will be moving within a few years, but you need to ensure that you will be able to handle increasingly higher payments should interest rates rise.
One way to use mortgage refinancing to your advantage is to take out a new mortgage for the same duration as your old mortgage. The lower interest rate will result in lower monthly payments.
For example, if you took out a $150,000 30-year fixed-rate mortgage at 7.5 percent (including transaction charges), your monthly payment is now $1,049. Refinance at 6 percent with a 30-year fixed-rate mortgage of $150,000 (including transaction fees), and your payment will be $899 per month. That’s a savings of $150 per month, which you can then use to invest, add to your retirement fund, or do with it whatever you please.
Another option is to exchange your old mortgage for a shorter-term loan. Your 30-year fixed-rate payment on a $150,000 loan was $1,049 per month. If you refinance with a 15-year fixed mortgage for $150,000 — including transaction costs — at 6 percent, your monthly payment will be $1,266. This payment is only $217 more than your previous mortgage, but your home will be fully paid for several years sooner, for a savings of more than $150,000! And some banks around the country are beginning to offer 10- and 20-year mortgages.
Either way you look at it, it’s an attractive idea.
If you’re considering refinancing your mortgage, call for an appointment with me at (805) 965-0101 and i can help determine whether refinancing your home would be a good move for you.
This material was written and prepared by Emerald.
© 2010 Emerald
© 2010 Emerald
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