The regulations for grantor retained annuity trusts say that GRATs must be for a “specified term of years.” The word “years” seems to tell us that a GRAT must be for more than one year, but, then again, saying “specified term of year” is an odd phrase. Would one year be OK? It would certainly be awkward to say “term of year” so perhaps one year is okay (but then the regulations could easily have said “a term of one year or more”). Consider the case of Kerr v. Commissioner, 113 T.C. No. 30 (December 23, 1999) in which both Mr. and Mrs. Kerr created GRATs on December 28, 1994. Both required two payments back to the Kerrs. The first payment was to occur one day later on December 29, 1994, and the second was to occur one year after that, on December 30, 1995. At that time, the GRAT’s were to terminate. The IRS challenged a related transaction – the creation of a family limited partnership with different classes of partnership interests, but the IRS completely ignored the GRATs.
Recent discussions on the ACTEC listserve have addressed the issue of whether a GRAT can exist for only one year. A couple of the contributors, including some nationally known estate planning attorneys, said they have created multiple such GRATs that were to last one year and a day. One said that a day is 1/365th of a year, and so one year plus 1/365th of a year means a GRAT that lasts for a “term of years.”
Consider these super short term GRATs in your planning. Consider how they would have worked over the last 12 months with the enormous run-up in the S&P and Dow. And with rates as low as they are, there may be little reason not to try using them.