GRAT Optimization for Life and Shorter of Term or Life

When the set the input for Optimization to "Yes" for a Life or Shorter (of term or live) calculation, an input that appears that you lets you select the optimization option:

Setting the option input to the Optimize For Taxable Gift of Residual Interest in Trust will calculate a payout with the smallest possible positive value for the remainder, using the annuity factor for the life and stated term (if any) and without regard to the possibility of exhaustion. In most cases, this will result in a payout that will exhaust the trust before the end of the stated term of the trust (for a Shorter trust) or during the possible lifetime of the grantor (in the case of a Life trust) .

Setting the option input to the Optimize For Taxable Gift Limited By Reg. 20.7520-3(b)(2)(i) will calculate the largest payout that will not exhaust the trust before the end of the stated term of the trust (for a Shorter trust) or during the possible lifetime of the grantor (in the case of a Life trust).

In each case, exhaustion is calculated using the 7520 rate and the methodologies used by the IRS in applying Reg. 20.7520-3(b)(2)(i).

"Optimize for Taxable Gift Limited by Reg. 20.7520-3(b)(2)(i)" is generally recommended, because it avoids the application of the exhaustion test under the regulations and so avoids the possibility that the trust will be required to make payments to the grantor that were ignored in valuing the remainder for gift tax purposes.

Note: These optimization calculations are only used when planning a GRAT and are not applicable to an existing GRAT with a payout rate stated in the trust document.