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A wealthy parent with millions invested in the stock market wants to leave future earnings to his kids and avoid the estate tax on those earnings.
1. The parent sets up a Grantor Retained Annuity Trust, or GRAT, listing the kids as beneficiaries.
2. The parent contributes, say, $100 million to the GRAT. Under the terms of the GRAT, the amount contributed to the trust, plus interest, must be fully returned to the parent over a predetermined period.
3. Whatever return the money earns in excess of the interest rate—the IRS currently requires 3 percent—remains in the trust and gets passed on to the heirs free of estate and gift taxes forever.
Executives Who Do It
• GE CEO Jeffrey Immelt
• Nike CEO Philip Knight
• Morgan Stanley CEO James Gorman
Next: The Trust Freeze