Estate Planning: Is it Time for an Art GRAT? by Michael Arlein

Disappointing as the economic downturn has been, it may present an estate planning opportunity for many art collectors. The depressed value of art means that outright gifts generate less gift tax than they would in a stronger economy, so for collectors who believe the economy will recover this may be an optimum time to give works of art outright to friends and family. By the same token, an art collector who believes his collection will recover its value at an annual rate greater than the prevailing IRS discount rate (ranging from 2.8% to 3.4% this summer) has an opportunity to create a Grantor Retained Annuity Trust (or “GRAT”), which is designed to shift part of the anticipated increase in value to friends or family without incurring any gift tax at all. With a Federal gift and estate tax rate of 45% and state transfer taxes on top of that in some states (including New York), a savvy collector who plans his giving thoughtfully may be able to realize substantial economic benefits right now.