NEW GRAT LEGISLATION PROPOSED

Yesterday, June 15^th, in a 247-170 vote, the House the Small Business Jobs Tax Relief Act of 2010 (H.R. 5486) that is projected to raise more than $5 billion (a questionable statistic, given recent stock market and real estate, and business performance) by altering the requirements of grantor retained annuity trusts (GRATs).

This piece of legislation would change existing law regarding the structuring of GRATs as follows:
           "(1)     A required minimum 10 Year Term,

(2)     Fixed amounts, when determined on an annual basis, can not decrease relative to any prior year during the first 10 years of the term, 
(3)     the remainder interest must have a value greater than zero determined as of the time of the transfer. 
(4)     The Effective Date would be for “transfers made after the date of the enactment of this Act.”

This is NOT law today, but time is running out on a family’s ability to implement short-term, high pay-out GRATs designed to capture unexpected upside in the financial markets for a concentrated asset position.

Here’s the potential impact of the three proposed new requirements:

1.  10-YEAR MINIMUM.

A Grantor’s required retained annuity interest would have to last at least 10 years. This significantly increases the probability that – during the term of the trust – the client will die and thus expose the assets in the trust to federal estate tax.  Obviously, this diminishes the appeal of a GRAT technique for older or sicker people. (Life insurance to “bullet-proof” the tax savings remains viable for younger and healthier people).  But even for younger healthier people, the inability to use short-term rolling GRATs may diminish the ability to remove short-term upside volatility and will thus reduce the appeal of some GRATs. (We have always counseled that a longer term and an annuity based upon internal cashflow and valuation discounts is a safer, superior design.)

2. NO DECLINING PAYMENTS:

Because of the second proposed rule, it would not be possible to circumvent the 10 year minimum rule by front-loading all the GRAT payments, and thus effectively make 10 year GRATs work economically similar to two year GRATs.

3. REQUIREMENT OF PRESENT VALUE GREATER THAN ZERO:  

Currently, a GRAT transfer can have an actuarial “zero value” for gift tax purposes. The proposed law would require “a value greater than zero.”  How much greater we don’t know.  It is rumored that the IRS would like to require that the value of the gift be at least 10% of the value of the assets transferred to the GRAT, similar to the rules for funding gifts to charitable remainder trusts (i.e., the charity has to have a present value interest at least equal to 10% of the value of the gift).  With a 10% rule, wealthy people would be precluded from using GRATs for large transfers. A transfer of more than $10 million to a GRAT, if 10% or $1 million had to be a current taxable gift, would require that gift tax be paid.

Grants to Nowhere

I just finished writing a pro bono grant for a favorite nonprofit of mine.  The grant application process was managed by Cybergrants.  At first blush, it appeared to be an efficient, electronic means of submitting grants applications.  Nevertheless, it did take me three days to get everything exactly the way I wanted it...downloads, uploads, scans, instructions, paragraph-after-paragraph I wrote, and then re-wrote...

When everything was just right, I had to hit the cyber-button that warned that all submissions are final and non-editable.  The grant that I'd spent three days writing, vanished into cyberspace, never to be seen again.  

Tired, bored, and happy it was all over with, something compelled me to go back and review the excel spreadsheet that the "X" Foundation forced me to use to lay-out the program budget.  I then realized that the "X" imposed excel spreadsheet automatically opened-up on the THIRD worksheet instead of the FIRST worksheet.  I completely missed two whole "X" worksheets, of questionable importance. 

I think at that point I cursed loud enough that the entire downtown area of Birmingham could hear me.  My three-day pilgrimage was sunk.  Over and done with before I (or my incredible nonprofit) even had a chance.  I had just written a grant to nowhere.

I couldn't help but recall over-and-over the conversation that I just had with a professional grant application reviewer who told me that over 80% of all grant applications his various national committees review go right in the trash because the grant writer didn't follow an instruction, like "don't staple". 

"It used to bother me" he said. "But, then I realized that if these people running these nonprofits can't follow simple instructions, how can they be trusted to administer grant monies?"  I was sad when I heard that - thinking of all those poor, perfectly capable, slobs who wrote grants to nowhere.  I saw his point, but it had nevertheless troubled me, as grant writing is not a life or death occupation...Can't a guy get a break for stapling something that should've been paperclipped?  Even the IRS, who makes similar requests re: no stapling of checks to tax returns, will let that one slide...And, almost any other entity or organization I can think of will ship a document back to you for a required correction, as opposed to trashing it. 

And, now I was one of those poor, perfectly capable, slobs who just did the cyber-equivalent of stapling a should've-been-paperclipped document.  That was (presumably) it!  Three days of my life wasted, and desperately needed dollars for an incredible start-up nonprofit sunk - all because "X" Foundation can't properly deliver a spreadsheet to open up on the FIRST page, not the last, and because at that point on day THREE, I was too tired to notice.  A grant to nowhere.

It got me thinking, is there a better mouse trap?  Isn't a simple one-page elevator pitch enough for the mighty grant application reviewers to size-up a grant request, with access to so much technology?  At the touch of a button, a grant reviewer can pull-up tax return information, check a non-profit's status, view a website or a blog, google-it...What more do they really need, aside from a one-page summary grant request? 

When a nonprofit approaches an individual or corporation for a donation, doesn't it usually amount to a quick one-minute elevator pitch?  And, boom - the check is written. No oversight, no follow-up, no strings generally attached.  Nothing.  Sometimes these same people are giving tens of thousands, if not millions of dollars...

But a grant request - now that's another story...It begins with intensive research to figure out what foundations even fund causes like yours.  From there, you have to figure out how each foundation wants you to present your request - in what format, and under what time frame.  It takes several days to put the information together.  Sometimes a preliminary "meet-and-greet" is required.  It's a crap-shoot at best that the funding will come-in.  It usually results in a restriction on the use of any funds that do come in.  And then the grants administration reporting kicks-in - like progress and final reporting on the actual use of the funds...  

Most nonprofits that are truly deserving of funding simply can't fathom the process or handle the burden. And, most grant writers are pro bono human beings, who, yes, in the midnight hour, may staple something that should be paperclipped, or miss a worksheet or two. 

I can't help but think of how many incredible causes are simply not on the radar of all the big foundations because of their grants application processes.
 
One of my favorite shows of the year was SHARK TANK. The business owners had a matter of minutes to present details on their funding request to a panel of investors, and on-the-spot, they either got funding or they didn't.

Isn't that really all a foundation needs to make a decision on whether a cause is worthy of funding?  I think so. 

The funny thing about all this is I think "X" Foundation realizes this as well.  At the very end of its Cybergrant application process, the last thing you MUST do is upload a one-page summary of your organization.  Say no more!!!