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Suppose earlier this year you read somewhere (this site, for example) that estate, gift, and generation-skipping transfer (GST) tax exemptions will drop in half in 2026, and that there is generally no clawback for gifts made before then which exceed the 2026 exemption amount.

Suppose you then immediately give outright to your children all shares in the family business LLC, filing the appropriate 709 gift tax return, using up almost your entire $12.92 mm lifetime estate/gift tax unified exemption amount. This successfully transfers almost $12.92 mm to your children, without gift tax, prior to the exemption dropping in half. Congrats on using the estate tax “bonus” exemption!

Bad news: Since you gave the LLC shares outright to your children, instead of a trust benefiting your children and their descendants, you cannot allocate GST tax exemption to that transfer. This results in an imbalance between your remaining unified estate/gift tax exemption (now close to zero), and your remaining GST tax exemption ($12.92 mm).

How can you now fix this situation and use up your GST exemption, when you have close to zero remaining gift tax exemption?

The answer is the zeroed-out 2 year GRAT (Grantor Retained Annuity Trust).

I’ll skip the confusing arithmetic, but basically the way this common planning technique works is, say you contribute to the GRAT a certain interest in a closely-held business, with the contribution getting a substantial discount in valuation, say 30%, based on such factors as lack of marketability and control. The annuity payment back to you, the grantor, over the two years, is calculated using the IRS 7520 rate to roughly approximate the contribution you made to the GRAT, so there is very little gift tax exemption used. You survive the two years, so the gift is not pulled back into your estate. As you expected, the business grows much faster than the 7520 rate and the excess value at the end of the two years goes to a remainder trust for your children and their descendants. Since you survive the two year period [estate tax inclusion period (ETIP) ends when the property is no longer includible in your gross estate], you are at that point able to allocate GST exemption in the amount of value in the remainder trust.

This is an extremely valuable tool for those who gave large outright gifts and therefore lack sufficient remaining gift tax exemption to use up GST exemption the normal way.

But time is running short! The GRAT must be created and funded on or before December 31, 2023, in order for it to work this way.