Shikuma Law Offices, PLLC in Seattle Washington is dedicated to providing personalized estate planning counsel and asset protection planning at a reasonable price. We can also assist you with medicaid planning, probate, trust administration, VA pension benefits planning, charity planning, pet trusts and much more. See our services and practice areas for more deatils.

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Elder Counselor Newsletter An Overview of Long Term Care Options

One of the greatest concerns for the elderly we serve and their families is that of long term care.  Two-thirds of seniors will need care at some point in their life and many have not planned for this likelihood.  It is an emotional and unpleasant topic to broach, but helping those we serve to plan ahead empowers them.  This issue of the ElderCounselor™ newsletter will focus on information necessary to assist elderly in making decisions that will likely eventually affect them and their loved ones.

Plan Ahead
According to the Centers for Disease Control, the average life expectancy at birth in the U.S. is projected to be approximately 79 years by 2015 and is projected to continue to rise.  Someone already 55 years of age has a higher life expectancy of around 84 years.  Since health declines as we age and we become more likely to need help with everyday activities, it is smart to consider what options will be available if and when assistance is needed.  Thinking about these things now helps people avoid making bad decisions during more stressful times when health has already declined to the point of needing assistance.

Care Options
There are several different levels of care available to elders as they age depending on their need for assistance.  Each level of care may include a medical and health component, a personal care component and/or a social and recreational component.

The first, and least invasive, type of care is adult day care which costs, on average, $18,200 per year.  These services may include medical and health services, social services or both.  This is a supportive group environment for seniors with cognitive and/or functional impairments.  These types of facilities are regulated differently in each state and are not federally regulated.

Home care is another type of assistance available to seniors.  The national average cost for Home care is between $20,800 and $21,840 per year based on a $20-$21 per hour rate.  Home care consists of either a home health aide or a companion / homemaker.  This type of assistance allows the senior to “age in place” as an outside service comes into the home to help.  Caregivers are hired through a variety of methods including agency, registry or private hire.  Each state licenses and regulates its home care agency system except for Medicare-certified agencies, which must comply with Federal regulations.

The next level of care is an assisted living facility (ALF).  The national average cost of staying in an ALF is $42,600.  Depending upon the chosen level of care, an ALF may provide services ranging from care management, assistance with every day activities, housekeeping, medication management, security, transportation, meals and social and recreational activities.  ALFs are governed by state standards and may include increased standards for communities with residents suffering from Alzheimer’s or other forms of dementia.  ALFs may also have staff training requirements or disclosure requirements relating to these diseases.  Medicaid, a federal program administered by the state that assists with long term care costs, may be available for residents of an ALF depending on current fiscal funding.

Finally, nursing homes are available to those who require the most assistance.  The national average annual cost of nursing homes is $81,030 for a semi-private room or $90,520 for a private room.  Nursing homes typically provide a secure environment and services to meet the physical, medical and social needs of their residents, such as:  room and board; nursing care; medication management; personal care; and social and recreational activities.  Many patients in nursing homes require assistance with multiple everyday activities (bathing, dressing, eating, toileting, transferring in and out of chairs or beds, and continence) and/or have cognitive limitations due to Alzheimer’s disease or another form of dementia.  Nursing homes, like ALFs, are subject to state and federal regulations.  Certain nursing homes accept patients who are qualified for Medicaid, which helps cover the costs of nursing home services.

Placement Considerations
It is important for the senior and family members to be clear on the services needed.  The service provider’s policies on included services must be considered.  The provider will likely have a basic services contract which lays out the services provided.  Any services falling outside of the basic agreement will be an additional charge to the senior.  It is imperative that the senior or the senior’s advocate has a clear understanding of the contract being entered into on the senior’s behalf, including who is obligated to pay for the services provided.
Another important consideration is the service provider’s policy regarding staff qualifications.  For example, some providers have staff trained in handling patients with Alzheimer’s disease and other forms of dementia while others may not.  It is important to find out what the facility’s training and education requirements are.

Another consideration is whether the service provider is a freestanding facility/entity or whether it is connected to another facility.  For example, there are ALFs that are freestanding and ALFs that are associated with or somehow connected to an assisted living community and/or hospital.  This is important in the event a patient can no longer live in an ALF environment and must transfer to a facility that provides more services or a more comprehensive level of care is required.

Finally, personal preferences should be considered in determining the proper placement for anyone requiring long term care.  For example the aesthetic value of the facility, the proximity to his/her family and friends, familiarity with his/her surroundings, and the personalities of other residents and staff are all very important to consider in making a decision.
It is important that the senior’s specific needs are considered in determining a proper placement.  Preparing a list of questions to ask of residents and staff is one way to assist in making the right choice.  Also, the senior and the senior’s loved ones should make their own list of necessary services to be provided and specific preferences desired.  Financial, medical, social and spiritual needs must be considered as well as the senior’s personal preferences.

Determining the appropriate level and type of care is one of many challenges facing seniors and their loved ones.  Other challenges include figuring out how to pay for the care, knowing what rights the senior has, understanding what Medicare will and won’t pay, and making sure that the right legal documents are in place to carry out the seniors’ wishes.   We have helped numerous families overcome these challenges through proper legal planning, and by taking a comprehensive look at each situation to determine the best course of action for the senior.

If you would like more information or if we can be of assistance to you or a family you are working with, please contact us.

Statistics from:  *The 2012 MetLife Market Survey of Nursing Home, Assisted Living, Adult Day Services, and Home Care Costs, November 2012.  www.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax advisor based on the taxpayer’s particular circumstances.

category: Elder Counselor (Newsletter)

Why a Special Needs Trust Can’t Automatically Terminate When the Beneficiary Gets Better

Not all disabilities are necessarily permanent. One question that typically comes up when an attorney is drafting a special needs trust for a beneficiary whose disability may end at some point is whether the attorney can write a clause into the special needs trust stating that the trust will dissolve if the beneficiary’s disability ends. The answer is almost always “no.”

Special needs planners, like other attorneys and counselors, don’t like to say no to their clients unless they have a good reason, and in this case, the reason that most special needs trusts can’t contain an “if the beneficiary gets better” clause is because such a clause would run afoul of the Social Security Administration (SSA) and Medicaid rules governing special needs trusts. Those complicated rules boil down to a fairly simple concept: if the trust contains language forcing the trustee to distribute funds to a beneficiary when some event takes place (for example, the beneficiary reaching a certain age or getting better), then the trust assets will be considered the beneficiary’s when it comes time to determine his eligibility for government assistance.

Because of this restriction, almost all special needs trusts are completely discretionary trusts, meaning that the trustee has total discretion to make distributions as long as they are in accordance with the priorities expressed by the donors who created the trust. Since special needs trusts, in order to be effective, have to contain this element of trustee discretion, it would defeat the purpose of the trust for it to contain a provision authorizing early termination if a beneficiary’s condition improves. SSA and Medicaid would view the assets in the trust as countable in making their eligibility determinations.

There are other good reasons for leaving assets in a special needs trust even if the beneficiary is no longer disabled. For example, a trust beneficiary’s creditors typically can’t reach funds placed in a purely discretionary trust by a third party. Once those funds come out of the trust, creditors can pounce on them. Likewise, a trust beneficiary who doesn’t have a disability anymore may still be completely incapable of handling large sums of money on her own, which is why many families draft trusts that are very similar to special needs trusts for healthy children who have shown that they aren’t good with money.

Of course, since most special needs trusts are completely discretionary, the trustee could, in very limited circumstances, choose to distribute all of the trust funds directly to the trust beneficiary. But before doing this, the trustee would need to have a very long conversation with her special needs planner about the ramifications of collapsing the trust.


category: Special Needs (Newsletter)

Elder Counselor Newsletter Understanding the Fiscal Cliff Legislation

Legislators were very busy New Year’s Eve and into the early morning hours of New Year’s Day to draft and ultimately pass legislation to avoid what was commonly referred to as “The Fiscal Cliff.” But what really happened? In summary, not much new was passed, but rather the legislation in large part made permanent the system of estate and income tax that has been in effect for the past two years. The new law did put off for two months some important spending cuts that must take place due to a process called “sequestration.” It is these additional cuts that could have a significant impact on our senior population and their loved ones.

This issue of the ElderCounselorTM will take a look at the new legislation and what is yet to come in the next several weeks in the way of spending cuts, including possible cuts to programs that serve the elderly.

The Bottom Line on What Was Passed
This newsletter provides a summary of the legislation that was passed and what remains to be decided. If you have questions or need additional information, please contact us directly.

Estate taxes. An estate tax is a federal tax (and in some states also includes a state tax) on the transfer of a deceased person’s assets to his heirs and beneficiaries, and can include prior transfers made to those heirs and beneficiaries. However, under federal law, there is a certain amount that can be transferred without incurring any tax liability. In 2010, every individual could transfer (gift) up to $5 million tax-free during life or at death to avoid paying estate taxes on that amount. This amount is called the “basic exclusion amount” and is adjusted for inflation (usually on an annual basis). In 2012 it was raised to $5.12 million per person.

This year’s new “fiscal cliff legislation” did not change how much an individual could transfer during life or at death to avoid paying federal estate taxes on that amount. And, on January 11, 2013, the IRS announced that the estate tax exclusion amount for individuals who die in 2013 is now $5.25 million, as the prior figure has now been adjusted for inflation.

What if no action had been taken with regard to estate taxes?

Without the new legislation, the $5.12 figure would have automatically reverted to $1 million per person, and the rate for most estates would have gone up to 55%. Instead, the only thing the new legislation changed was the gift and estate tax rate, which has gone up to a top rate of 40%, from a maximum of 35% in 2012.

Married couples. The new legislation did not change prior law that stated that spouses do not have to pay estate tax when they inherit from the other spouse. Rather, when the first spouse dies, the other spouse can inherit the entire estate and any estate tax due would be postponed until the second spouse dies. This is called the “marital deduction.” If the surviving spouse is not a U.S. citizen, then there are restrictions on how much can be passed to the surviving spouse tax-free. It is also important to remember that this type of tax benefit between spouses is not always automatic – any married couple who may be subject to estate tax should seek the advice of an attorney to make sure their estate plan is properly set up to take advantage of this particular tax incentive.

What about lifetime gifts? The current basic exclusion amount of $5.25 million per individual is an exclusion for both lifetime gifts and gifts at death. This is often referred to as the “unified credit” amount. For example, an individual could transfer assets of $2 million duringtheir lifetime and an additional $2.25 million at death, and the total, $5.25 million, would not be subject to either gift or estate tax. However, if an individual transferred more than the $5.25 limit, that individual (or the heirs) will owe a tax of up to 40%.

The donor should report any gifts made during their lifetime to the IRS so a proper calculation can be made at the donor’s death. Using the above example, the $2 million lifetime gift would have been reported to the IRS even though no gift tax would be due. And, the IRS would then know that individual had $2.25 remaining to pass at death free of estate taxes.

There are additional gifting advantages available to married couples during their lifetime, and advice should be sought from an attorney versed in this area to determine what, if any, gifting incentives may be available.

Lifetime gifts that do not count toward the $5.25 million exclusion amount. There is an amount each year that can be transferred without counting toward the $5.25 exclusion amount. In 2013, that amount is $14,000 per year, per person (called an “annual exclusion amount”). For example, an individual can give three different people $14,000 in 2013, and it will not count toward the $5.25 lifetime exemption amount. Couples can double this amount and give $28,000 per person per year.

Planning Note: It is important to remember that any gift (unless designated as an exempt transfer under the federal and state Medicaid rules) will cause a penalty for Medicaid purposes. Individuals often believe that because they can transfer $14,000 per year per person under the tax rules, the same applies to Medicaid. The rules are very different for Medicaid, and a penalty will apply if that type of gift is made.

Changes to the income tax rules. This newsletter highlights the main points of the income tax rules that could directly affect seniors and their loved ones. For additional information on the alternative minimum tax or charitable gifting, please contact us directly.

In prior years, everyone enjoyed a 2% Social Security tax reduction as a stimulus measure. Under the 2013 legislation, this “tax holiday” was not extended; therefore, everyone will see a decrease in their net pay.

Ordinary income tax rates increase from 35% to 39.6% for singles earning more than $400,000 a year ($450,000 a year for married couples). All other ordinary income tax rates effective in 2012 were made permanent.

For those individuals earning over $200,000, and for married couples who earn over $250,000, there is a new Medicare 0.9% surtax on ordinary income and a new 3.8% surtax on investment income. These additional taxes were part of the 2010 health care legislation, much of which begins implementation in 2013.

The top capital gains and dividend rate increased to 20% for those earning more than $400,000 a year ($450,000 for married couples).

Additional Cuts Are on the Way
The current fiscal cliff legislation did not address the automatic spending cuts that were to take place on January 1, 2013. Instead, the automatic cuts, known as sequestration, were pushed back two months to March 1, 2013. Sequestration was one portion of the spending cuts included in the Budget Control Act, passed and signed in August 2011.

The Budget Control Act of 2011 allowed the president to raise the debt ceiling by $2.1 trillion, and it instituted two rounds of significant spending cuts. One round of cuts involved government programs like defense spending, education funding, the FBI and other government agencies that would receive automatic budget cuts relative to their scheduled growth over the next 10 years.

The second half of the spending cuts was supposed to be decided on by Congress through a Joint Select Committee on Deficit Reduction. This Committee (referred to as the “supercommittee”) was to come up with a list of cuts that would then be put to Congress for a full vote. If the committee couldn’t agree on the cuts, $1.2 trillion in further spending reductions over 10 years would be implemented starting Jan. 1, called the “sequester.” No cuts have yet been agreed upon, and the automatic spending reductions have been moved back to March 1, 2013, to allow Congress time to come to an agreement.

Programs like Medicare, Medicaid and Social Security have been the topic of discussion for the second portion of the spending cuts. We will continue to monitor and report on the progress of Congress as it pertains to these spending cuts and how they will impact our senior population and their families.

The fiscal cliff legislation is in place; however, there is more legislation to occur that could have a significant impact on those affected by programs like Medicare, Medicaid and Social Security. While many families may not be affected by the current estate and income tax rules, there are many who could have their life savings consumed by long term care costs. We help seniors and their families plan ahead to avoid a financial crisis, even if a health care crisis occurs. If you would like to learn more or if we can help someone you know, please give us a call.
To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax advisor based on the taxpayer’s particular circumstances.

category: Elder Counselor (Newsletter), Estate Planning Advisor, General Articles

Elder Counselor Newsletter VA Service-Connected Disability Compensation

The Veterans Administration provides an important benefit program for veterans who have service-connected disability. The program is called “Compensation” and is different from the non-service-connected “Pension” program that elder law attorneys often discuss with wartime veteran clients or their surviving spouses. Like the pension program, VA compensation comes in the form of income-tax-free money payments to the veteran, who must have received a discharge other than dishonorable, or certain of their family members. The big difference from the pension program, however, is that VA compensation entirely flows from the linkage between the veteran’s disability and his or her military service.


For most veterans, the key issues in accessing VA compensation benefits have been proving service connection for the disability, and then dealing with the disability level rating that the VA assessment system applies to the particular veteran’s case. Often veterans who prove service connection are nonetheless frustrated by their disabilities being rated in seemingly unreasonably low percentages, such as 30% disabled rating, with the result that their compensation benefits may not be adequate to sustain them despite the actual disabling effects on their lives.

It is important to be aware that the surviving spouse of a compensation recipient may be eligible for a benefit called DIC, Dependency and Indemnity Compensation. DIC applies to the surviving spouse of a veteran who died of his or her service-connected disability, or who received VA compensation for a period of 10 years prior to death not caused by the service-connected disability. For more information about DIC, see the VA website at

The Presumptive Disease List
As Vietnam War veterans become “elders” in their 60s and 70s, it is increasingly important for professional advisors of all kinds to be aware of a special situation that applies to them. This special situation is the “presumptive disease list.”

Three decades ago, litigation on behalf of disabled Vietnam veterans who had been exposed to Agent Orange established that certain diseases were associated with Agent Orange exposure. Although proving the Agent Orange causal relationship was a difficult legal battle, that battle has been won in regard to many diseases. There is now a lengthy list of Presumptive Diseases that have been proven to be caused by exposure to Agent Orange, and the list keeps growing as time passes. A veteran who can prove that he or she placed a “boot on the ground” in Vietnam during the war and has any disease on the list may be rated 100% service-connected disabled, without having to prove individually that his or her affliction was actually caused by service in Vietnam. There is now a legal presumption that Vietnam service caused the disease.

According to the VA website:

VA assumes that certain diseases can be related to a Veteran’s qualifying military service. We call these “presumptive diseases.”

VA has recognized certain cancers and other health problems as presumptive diseases associated with exposure to Agent Orange or other herbicides during military service. Veterans and their survivors may be eligible for disability compensation or survivors’ benefits for these diseases.
At this time, fourteen categories of diseases are on the presumptive disease list.

  • AL Amyloidosis – A rare disease caused when an abnormal protein, amyloid, enters tissues or organs
  • Chronic B-cell Leukemias – A type of cancer which affects white blood cells
  • Chloracne (or similar acneform disease) – A skin condition that occurs soon after exposure to chemicals and looks like common forms of acne seen in teenagers. Under VA’s rating regulations, it must be at least 10 percent disabling within one year of exposure to herbicides.
  • Diabetes Mellitus Type 2 – A disease characterized by high blood sugar levels resulting from the body’s inability to respond properly to the hormone insulin
  • Hodgkin’s Disease – A malignant lymphoma (cancer) characterized by progressive enlargement of the lymph nodes, liver, and spleen, and by progressive anemia
  • Ischemic Heart Disease – A disease characterized by a reduced supply of blood to the heart, that leads to chest pain
  • Multiple Myeloma – A cancer of plasma cells, a type of white blood cell in bone marrow
  • Non-Hodgkin’s Lymphoma – A group of cancers that affect the lymph glands and other lymphatic tissue
  • Parkinson’s Disease – A progressive disorder of the nervous system that affects muscle movement
  • Peripheral Neuropathy, Acute and Subacute – A nervous system condition that causes numbness, tingling, and motor weakness. Currently, it must be at least 10 percent disabling within one year of herbicide exposure and resolve within two years. VA proposed on Aug. 10, 2012, to replace “acute and subacute” with “early-onset” and eliminate the requirement that symptoms resolve within two years.
  • Porphyria Cutanea Tarda – A disorder characterized by liver dysfunction and by thinning and blistering of the skin in sun-exposed areas. Under VA’s rating regulations, it must be at least 10 percent disabling within one year of exposure to herbicides.
  • Prostate Cancer – Cancer of the prostate; one of the most common cancers among men
  • Respiratory Cancers (includes lung cancer) – Cancers of the lung, larynx, trachea, and bronchus
  • Soft Tissue Sarcomas (other than osteosarcoma, chondrosarcoma, Kaposi’s sarcoma, or mesothelioma) – A group of different types of cancers in body tissues such as muscle, fat, blood and lymph vessels, and connective tissues

Children with Birth Defects: VA presumes certain birth defects in children of Vietnam and Korea veterans are associated with veterans’ qualifying military service.

Veterans with Lou Gehrig’s Disease: VA presumes Lou Gehrig’s Disease (amyotrophic lateral sclerosis or ALS) diagnosed in all veterans who had 90 or more days of continuous active military service is related to their service, although ALS is not related to Agent Orange exposure.

Some of these diseases — such as type 2 diabetes, ischemic heart disease, Parkinson’s disease, and prostate cancer — are not extremely rare in the general population, so there is a very high likelihood that any professional financial or healthcare advisor will be able to help at least some, and maybe many, clients and other contacts by making them aware of the existence of the VA service-connected disability compensation program and the presumptive disease list.

Eligibility Based on Vietnam or Korea Service
For the purposes of disability compensation, VA presumes that veterans were exposed to Agent Orange or other herbicides if they served:

Veterans who served in Korea during certain Vietnam War years and now have diseases on the presumptive disease list may also be eligible for compensation.

Until 2011, veterans who served on ships in the waters off Vietnam during the war but never went ashore there were not treated similarly. However, this too has changed. Since 2011, veterans who served on certain ships in the waters off Vietnam during the war can also be rated as 100% service-connected disabled without having to prove that their disease on the presumptive list was actually caused by exposure to Agent Orange. See “VA Posts Online List of Ships Associated with Presumptive Agent Orange Exposure.”

More thorough information about the level of documentation of service is provided on the VA website at

Eligibility for Veterans Outside of Vietnam or Korea
Veterans who do not meet the criteria for presumed exposure to Agent Orange may be eligible for service-connection for related disabilities. This includes:

These veterans must show that they were exposed to Agent Orange or other herbicides during military service to be eligible for service-connection for presumptive diseases.

Veterans who believe they have a disease caused by herbicide exposure, but it is not a presumptive disease, must show that:

  1. They were exposed to herbicides during military service
  2. There is an actual connection between the disease and herbicide exposure during military service

Exception: Blue Water veterans with non-Hodgkin’s lymphoma may be granted service-connection without showing inland waterway service or that they set foot in Vietnam. This is because VA also recognizes non-Hodgkin’s lymphoma as related to service in Vietnam or the waters offshore of Vietnam during the Vietnam Era.

Check VA’s Guide to Agent Orange Claims to learn more about how to establish eligibility to disability compensation and how much VA pays.

How to Apply
You may apply for disability compensation online.

Vietnam veterans with chronic b-cell leukemias, Parkinson’s disease, or ischemic heart disease may apply for disability compensation for these diseases using VA’s Fast Track Claims Processing System.

After VA receives an application, they will send you a letter that explains what evidence they need in order to grant the claim. Attorneys can help clients get records to support their claim, including records of Vietnam service or exposure to Agent Orange or other herbicides during military service. Learn more about the disability claims process.

The VA website is the best place to get information about the Compensation program and the presumptive disease list. It is a good idea for all advisors to check the VA website presumptive disease list at least annually in order to be aware of newly added diseases on the list. Just mentioning this program and the presumptive disease list to a Vietnam-era veteran, the surviving spouse or children of a Vietnam veteran can make a huge financial difference for them, as well as providing some peace of mind and answers to health questions that may otherwise plague them.

One elder law colleague recounts such a situation:

“I made a continuing education presentation to a group of CPAs in the summer of 2012 on key topics in elder law. When providing an introduction to VA benefits, I explained the difference between non-service-connected pension benefits and service-connected compensation, then spoke briefly about the presumptive disease list. At the next break, a CPA thanked me profusely for sharing the existence of the presumptive disease list with the audience. She told me that her husband was a Vietnam veteran and for the past three years had diabetes, a situation that completely stumped him because he had none of the common risk factors and his was the first known case of diabetes in his family. My mention of the presumptive disease list and specifically mentioning diabetes may have been the key to helping this family financially and providing a way to find answers. Since that time I make a point to mention the presumptive disease list whenever I encounter someone — client, friend, or general public — who is a Vietnam veteran or is related to one. At least one other Vietnam veteran I have told is in the process of obtaining VA compensation benefits.”

This important information is surprisingly little known by large numbers of Vietnam-era veterans and their families. We are happy to help spread the word! If you have questions about anything in this newsletter, please feel free to contact us.


category: VA Aid and Attendance

Grantor Retained Annuity Trusts (GRAT)

Q1.      So, what is a GRAT?

A1. Actually, I think it will be easier if I describe the participants first:

Annuitant – As with any type of annuity, there is a person who receives the annuity payments.  In a GRAT, the client is typically the person who receives the payments from the GRAT.  It is important to keep in mind that the GRAT is a special from of trust designed to make stipulated payments to the Annuitant.

Trust – The trust is the essence of the GRAT, in that it holds the property, $1,000,000 in our example.  As illustrated below, the client/Annuitant is the person who transfers the property into the trust, in return for a specified payment from the trust to the client/Annuitant:

Now that you have seen the participants, the remaining explanations will be easier to put in perspective.

Q2.      How is the amount of the annuity arranged?

A2. This is the essence and most difficult aspect to explain.  The factors to be considered are:

Term Interest – The Term Interest refers to the length of time that the annuity payments are payable to the Annuitant.

Remainder Interest – At the end of the Term Interest, the annuity payment stops and the Property in the GRAT passes, generally, to a trust for the benefit of the client/Annuitant’s children.

Potential Gift – There are three aspects of the GRAT transaction that may result in a gift.

  1. a. Value of the Property – As we know, the value of the Property is $1,000,000.
  2. b. Term and Remainder Interests – When the use of property is divided into a Term Interest and a remainder interest, each has a separate value based upon the value of the property and the length of the Term Interest.  As an example, assume that the market rate of interest is 5%.  We now have to divide the use of the Property in the GRAT into a Term Interest and a Remainder Interest.
  3. c. Division of the Property – For an example, let’s assume that the Term Interest, the time the annuity is paid to the Annuitant, is 10 years, when the Property in the GRAT passes to the holders of the Remainder Interest.  We use the assumed 5% rate to determine the value of the Term Interest held by the Annuitant:

Actuarially, the value of a 10 year Term Interest, at 5%, equals $386,000.  Thus, the Remainder Interest has a value of $614,000, which means that such an annuity arrangement results in a gift by the Annuitant of $614,000.

  1. d. Avoiding the Gift – Rather than the assumed interest rate of 5%, the Internal Revenue Service provides an interest rate to be used.  The interest rate is provided in Internal Revenue Code Section 7520, based on a mix of marketable securities.  The current rate is 1.2%.  The value of the Remainder Interest for 10 years at 1.2% is:

Term Interest – $112,000

Remainder Interest – $882,000

It is important to remember that we have not taken the annuity payment into account.  That means the Term and Remainder Interests, taken on their own, only reflect the actuarial value without taking into consideration the fact that the Annuitant not only has use of the Property at the Internal Revenue Service’s proscribed rate.

Let’s go to the next step, the Annuity amount retained by the Annuitant.  This is a mathematical formulation designed to make the Remainder Interest equal to zero, so that no gift is made, this is referred to as a Zeroed-Out GRAT.

If the Annuity amount retained by the Annuitant is 10.6%, the value of the Remainder Interest is $6,700, deemed acceptable for purposes of this illustration.

Q3.      What does the math do?

A3. We are now at the crux of the matter.  As 10.6% reduces the value of the Remainder Interest to an acceptable amount, we now need to see if the $1,000,000 Property produces sufficient income.  Assume the property does, indeed, produce $106,000 in income per year, and, in addition, appreciates to $2,000,000 at the end of the 10 year Term Interest.

Here is how the math works out, from an estate and gift tax standpoint:

Annuitant’s Gift – $   6,700

Annuitant’s Accumulated Income               $1,060,000 (pre-tax)

Appreciation Shifted to Heirs $   940,000  ($2,000,000 – $1,060,000)

Q4.      Who pays the income taxes on the Property’s income?

A4. Because the GRAT is a “grantor trust,” the Annuitant pays the income taxes, so the $1,060,000 is reduced by income taxes, and other planning techniques.

Q5.  What happens if the Annuitant dies prior to the end of the Term Interest?

A.5 In that event, the property is included in the estate of the Annuitant, and the loss of benefits.

category: Trusts