How a “Cascading GRAT” strategy works G) Grantor transfers asset(s) to an irrevocable trust. Grantor may manage GRAT assets as @ IF necessang, grantor pays gift or trustee. uses gift tax exemption on transfer @ Grantor pays little or no gift tax, or uses Grantor ® Grantor pays tax on ordinary income gift tax exemption*, on present value of Grantor anto and realized gain earned by the trust trust remainder** “pa neFArS @) asset(s) . —— Year 0 GQ) Annuity payments from existing GRATs fund a new GRAT und a new G @) Annuity payments funds new GRAT : 3 GRAT 2 @) Grantor pays tax on ordinary income and Year 1 = realized gain earned by the trust (but not Anas on annuity amount transferred from trust to grantor) Remaining 6) When trust term ends, remaining trust Beneficiaries’ rd suits assets pass to beneficiaries free of gift tax Trust (er — if grantor does not survive the term, G) = trust assets are included in the estate and subject to Trust ends @) Annuity payment funds new GRAT estate tax *Gift tax exemption in 2012 shelters up to $5,120,000 per individual of value transferred from gift tax. **Calculation based on Treasury discount rate in effect at time of funding GRAT. A recent Tax Court decision (Walton v. Commissioner, 115 T.C. No. 41 (Dec. 22, 2000)) allows GRAT to be “zeroed out,” eliminating the need to incur any gift tax. J.P Morgan 4 HOUSE_OVERSIGHT_022354