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Virginia Tax Review

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On November 5, 1990, legislation of vital importance to the estate-planning community was enacted. Adding chapter 14 to the Internal Revenue Code ("Code"),the legislation adopted a comprehensive framework for dealing with various estate-freeze techniques, which taxpayers had been utilizing for the purpose of minimizing -- and, in some cases, avoiding -- transfer-tax liability.One technique explicitly targeted in the new legislation is the grantor retained income trust (the "GRIT").

The GRIT is a variation on the inter vivos gift, which has long been used by taxpayers as an estate-planning strategy designed to reduce transfer-tax liability.While Congress has sought to eliminate the transfer-tax advantages inherent in the making of inter vivos gifts, it has not been entirely successful.However inappropriate as a matter of policy, the inter vivos gift remains a viable and important technique for achieving transfer-tax savings. In the 1980's, tax planners began to realize that the GRIT was a particularly attractive method by which to effect an inter vivos gift, making the GRIT one of the most popular estate-planning strategies.

In appropriate circumstances, the GRIT could produce more wealth for its remainderman than a comparable outright gift might produce for a donee.In essence, the GRIT would be structured to require that trust income be paid to the grantor for a period of years designated in the trust instrument. Upon the expiration of this period of years, the trust would terminate, and the corpus would pass to the remainderman.