Apr 1, 2005 12:00 PM, By Neil H. Weinberg, partner, Katten Muchin Zavis Rosenman, Chicago

By: By Neil H. Weinberg, partner, Katten Muchin Zavis Rosenman, Chicago

For closely held family business owners who want their businesses to pass to the next generation, there are various estate-planning techniques that should help them avoid significant transfer tax costs. These range from simple gifts of family business interests that are sheltered by the gift tax annual exclusion or the applicable exclusion amount, to more complex installment sales to defective grantor trusts and grantor retained annuity trusts (GRATs). The best choice for pass-through entities that generate steady cash flow is the GRAT as it allows the largest amount of the family business to be transferred with the least amount of gift tax cost or exposure.

Under a GRAT, the owner of a closely held business (the grantor) transfers all or a portion of his interests in the business to an irrevocable trust that satisfies the requirements of Internal Revenue Code Section 2702 and its corresponding regulations. The GRAT's terms specify that the grantor retains the right to receive annual annuity payments for a designated period of years (the GRAT period).

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