Aug 1, 2008 12:00 PM, By David L. Weinreb & Gregory D. Singer

By: By David L. Weinreb & Gregory D. Singer

As the Internal Revenue Code's Section 7520 rate dropped this year to near-record lows (down to 3.2 percent in May 2008), some estate planners began recommending that clients create long-term grantor retained annuity trusts (GRATs) to lock in a low hurdle rate.¹ This may seem commonsensical, like locking in a low mortgage rate on a home loan. But it's probably a bad idea.

If one's goal is to transfer relatively volatile liquid assets, such as publicly traded stocks, research shows that a series of rolling short-term GRATs is a far more effective strategy than a long-term GRAT, regardless of the 7520 rate at the strategy's inception.² (For illiquid, hard-to-value assets, though, a longer-term GRAT may be better. See “A Notable Exception,” p. 24.)

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