Tax strategies

[Munger_Disciple]

2 hours ago, charlieruane said:

@Munger_Disciple If you and your partner stand any chance of passing on more than the lifetime gift exemption, GRATs are no-brainers. Compared to the savings, the costs are trivial—like, a few thousand dollars in legal fees to a trusted estate tax lawyer. And if the GRAT fails (i.e. if securities in the GRAT do not appreciate), there is no non-legal-fee cost to you; you just start a new GRAT. 

 

And yeah, you're correct—here's the Munger filing. Nothing GRAT-y here, I just flagged it because it involved some interesting estate-tax maneuvering centered on trading promissory notes for equities. 

 

Feel free to DM me if you end up doing it! 

 

Thanks @charlieruane! I will pursue this GRAT thing & DM with any questions that may come up.

[Munger_Disciple]

50 minutes ago, LC said:

How do taxes inside the GRAT work? 

 

Assume I put 5M of Berkshire stock in a GRAT, zero'd out over 5 years (1M per year). 

 

Presumably every year selling 1M of Berkshire stock generates some capital gains - where does that liability reside? 

 

You just transfer $1M worth of stock in-kind back to yourself to satisfy the annuity requirement. No taxes owed (you are transferring from you to yourself). That's why it's called "grantor retained" annuity trust. Only the appreciation (above the "risk-free" rate as published by IRS) accrues to your heirs. That's my understanding anyway; please consult an expert. 

[charlieruane]

The GRAT is part of your tax return, and you can make annuity payments from the GRAT in-kind with securities, so you never have to sell securities along the way. No capital gains taxes incurred. You can just cycle the Berkshire stock into and out of GRATs over and over again. 

 

Also, I should've mentioned earlier that the minimum term for a GRAT is two years. 

 

EDIT: Oh, yeah, what Munger_Disciple said is right. Just didn't see his reply before I sent mine. 

 

Edited August 28, 2025 by charlieruane

[charlieruane]

Oh, one more cool move you can make with promissory notes: say you set up a GRAT and load it with $10mm of fairly-valued Berkshire. Then, the market crashes and those shares are trading for $5mm, a 50% discount to intrinsic value. You can swap the $5mm of undervalued Berkshire shares for a promissory note, immediately move the undervalued Berkshire shares into a new GRAT, and just let the original GRAT go bankrupt over its two-year life span with no cost to you. Meanwhile, the undervalued Berkshire mean-reverts in the new GRAT from $5mm to $10mm, which means you can pass on $5mm of appreciation free of estate tax to your heirs. 

[Munger_Disciple]

18 minutes ago, charlieruane said:

Oh, one more cool move you can make with promissory notes: say you set up a GRAT and load it with $10mm of fairly-valued Berkshire. Then, the market crashes and those shares are trading for $5mm, a 50% discount to intrinsic value. You can swap the $5mm of undervalued Berkshire shares for a promissory note, immediately move the undervalued Berkshire shares into a new GRAT, and just let the original GRAT go bankrupt over its two-year life span with no cost to you. Meanwhile, the undervalued Berkshire mean-reverts in the new GRAT from $5mm to $10mm, which means you can pass on $5mm of appreciation free of estate tax to your heirs. 

 

Yeah the promissory note is a cool idea. You could simply reduce the principal amount of the note to satisfy your annuity requirements!

[charlieruane]

Yes, exactly—you just trim the note in the GRAT to meet the requirement. Just have to net out the interest YOU owe on the note from the annuity payment the GRAT owes you. 

[Munger_Disciple]

15 minutes ago, charlieruane said:

Yes, exactly—you just trim the note in the GRAT to meet the requirement. Just have to net out the interest YOU owe on the note from the annuity payment the GRAT owes you. 

 

Makes perfect sense

[LC]

Thanks both on the tax explanation.

 

I wonder if you could play games with illiquid securities to effect exactly the situation you are hypothesizing with $5M of undervalued Berkshire shares. 

 

[73 Reds]

14 hours ago, charlieruane said:

Oh, one more cool move you can make with promissory notes: say you set up a GRAT and load it with $10mm of fairly-valued Berkshire. Then, the market crashes and those shares are trading for $5mm, a 50% discount to intrinsic value. You can swap the $5mm of undervalued Berkshire shares for a promissory note, immediately move the undervalued Berkshire shares into a new GRAT, and just let the original GRAT go bankrupt over its two-year life span with no cost to you. Meanwhile, the undervalued Berkshire mean-reverts in the new GRAT from $5mm to $10mm, which means you can pass on $5mm of appreciation free of estate tax to your heirs. 

I'm kind of scratching my head on this.  If your Berkshire shares lose $5 million those are effectively your losses.  What have you gained by the GRAT?  Also, what if you die before the GRAT expires- are the assets part of your estate?  And if the GRAT's assets do appreciate in value, isn't the Grantor (i.e., you) still liable for income taxes on the appreciation?  Seems like the way this works is *IF* the assets actually appreciate and you outlive the GRAT.  Neither is a given.  If you have lots of beneficiaries and are married, you can give quite a bit of net worth away each year tax-free.  Much more so if you are charitably inclined.  If you give away the annual gift-tax exclusion equivalent of Berkshire each year to your intended beneficiaries and live a while longer, you've reduced the value of your estate by the cumulative sums of yearly gifts plus all appreciation of those shares without any hassles.   For my $, unless you are among the super-wealthy, an irrevocable life insurance trust intended to cover some or all of your anticipated estate tax liability makes a lot of sense without the risk of subjecting your estate to IRS scrutiny.

[charlieruane]

Yeah, this strategy only becomes relevant at a pretty high level of net worth, and you're right that there are other methods (SLATs, FLPs, life insurance trusts, annual gifts, etc.). 

 

To your questions: 

 

- If you put in $10mm of BRK and it craters to $5mm, you should pull out that $5mm BRK and move it into a new trust. The first GRAT will fail, which costs you nothing, and the $5mm of BRK will (hopefully) mean revert up in the new GRAT; any increase in value above the token discount rate can then be passed on to heirs outside of your estate. So, yeah, if the securities you put into the GRAT crash by 50% because their intrinsic value has crashed by 50%, well, you're out of luck. But if the crash was rooted in random noise/volatility, that can be exploited with additional GRATs. Basically, GRATs give your heirs a (nearly) free option on the securities you put in them.

 

- You are indeed still on the hook for the capital gains taxes in the appreciated securities, but your goal is to keep those securities in your estate as long as possible and pass on GRAT remainders to your heirs in cash/t-bills, or other high-basis securities. Try to keep the high unrealized capital gains stuff in your estate until you die so its basis will be stepped up. Also, think about it - GRATs can actually decrease the size of your taxable estate over time if the securities you contribute have a lot of volatility and you do all you can to exploit that. 

 

- If you do not outlive the GRAT, you're right, the assets remain part of your taxable estate. But say you start doing rolling GRATs with 2-year durations every 6 months at the age of 60. Assuming you live another 20 years, you'll probably live long enough to see multiple successful 2-year GRATs. 

 

- The IRS scrutiny concern is real and is magnified if you swap in promissory notes, but this is a totally standard estate planning tool at this point for folks of certain means. 

 

- Definitely agree that gifting the annual limit to as many people as possible is a better first step, as is paying for grandkids' private educations (can be done outside of one's estate). GRATs come later.

 

Also, I'm not, like, an estate lawyer or anything, so anyone thinking about doing this should consult with someone experienced before moving forward with this.

Edited August 29, 2025 by charlieruane

[73 Reds]

5 minutes ago, charlieruane said:

Yeah, this strategy only becomes relevant at a pretty high level of net worth, and you're right that there are other methods (SLATs, FLPs, life insurance trusts, annual gifts, etc.). 

 

To your questions: 

 

- If you put in $10mm of BRK and it craters to $5mm, you should pull out that $5mm BRK and move it into a new trust. The first GRAT will fail, which costs you nothing, and the $5mm of BRK will (hopefully) mean revert up in the new GRAT; any increase in value above the token discount rate can then be passed on to heirs outside of your estate. So, yeah, if the securities you put into the GRAT crash by 50% because their intrinsic value has crashed by 50%, well, you're out of luck. But if the crash was rooted in random noise/volatility, that can be exploited with additional GRATs. Basically, GRATs give your heirs a (nearly) free option on the securities you put in them.

 

- You are indeed still on the hook for the capital gains taxes in the appreciated securities, but your goal is to keep those securities in your estate as long as possible and pass on GRAT remainders to your heirs in cash/t-bills, or other high-basis securities. Try to keep the high unrealized capital gains stuff in your estate until you die so its basis will be stepped up. Also, think about it - GRATs can actually decrease the size of your taxable estate over time if the securities you contribute have a lot of volatility and you do all you can to exploit that. 

 

- If you do not outlive the GRAT, you're right, the assets remain part of your taxable estate. But say you start doing rolling GRATs with 2-year durations every 6 months at the age of 60. Assuming you live another 20 years, you'll probably live long enough to see multiple successful 2-year GRATs. 

 

- The IRS scrutiny concern is real and is magnified if you swap in promissory notes, but this is a totally standard estate planning tool at this point for folks of certain means. 

 

- Definitely agree that gifting the annual limit to as many people as possible is a better first step, as is paying for grandkids' private educations (can be done outside of one's estate). GRATs come later.

 

Also, I'm not, like, an estate tax lawyer or anything, so anyone thinking about doing this should consult with someone experienced before moving forward with this.

Thanks for the explanation.  I assume the GRAT has to pay annuity payments to the Grantor, some part of of which are taxable (per IRS tables) ?  If you only contributed share of a stock such as Berkshire, would the Trust have to sell some of the shares each year in order to fund annuity payments to the Grantor?  Or otherwise, if you contribute income/dividend generating assets, are you (the Grantor) on the hook for all taxable dividends or interest generated by these contributed investments or only that portion of the annuity payments that do not constitute return of principle?  Just trying to understand the basics.

[charlieruane]

GRATs can make annuity payments in-kind with securities, so they can just pay out BRK shares (or reduce the value of a promissory note if you've done a note swap). And I'm pretty sure that since the GRAT is still part of your tax return, you don't owe tax on the annuity payments issued by the GRAT; the GRAT is still you, hence "Grantor-Retained." You do owe tax on any interest/dividends produced by securities in the GRAT, though. 

 

(I think that's right, at least. Again, I'm not an expert and haven't created any of these myself, I've only observed them work for others.) 

Edited August 29, 2025 by charlieruane

[73 Reds]

3 minutes ago, charlieruane said:

GRATs can make annuity payments in-kind with securities, so they can just pay out BRK shares (or reduce the value of a promissory note if you've done a note swap). And I'm pretty sure that since the GRAT is still part of your tax return, you don't owe tax on the annuity payments issued by the GRAT; the GRAT is still you, hence "Grantor-Retained." You do owe tax on any interest/dividends produced by securities in the GRAT, though. 

 

(I think that's right, at least. Again, I'm not an expert and haven't created any of these myself, I've only observed them work for others.) 

I would think that if the Trust is irrevocable for its duration, it would be its own entity for tax purposes and have to pay taxes on income it does not pay out to beneficiaries, but again, not sure and only thinking out loud.

[charlieruane]

No, I'm pretty sure it's part of your tax return. Grantor-Retained. You personally owe tax on any interest, dividends, or realized capital gains from securities within the GRAT. 

Edited August 29, 2025 by charlieruane

[73 Reds]

2 minutes ago, charlieruane said:

No, I'm pretty sure it's part of your tax return. Grantor-Retained. You personally owe tax on any interest, dividends, or realized capital gains from securities within the GRAT. 

So then it is taxed as a Revocable Trust to the Grantor.  I'll have to research this some.  Thanks.

[charlieruane]

No prob!

[brobro777]

Dude this sounds like aggressive strategy that's worth it for really high net worth guys, not some piker living in LA making a few hundred Ks in cap gains per year

 

Maybe one day it can be worth pursing for me... one day...

[UNF2007]

1 hour ago, brobro777 said:

Dude this sounds like aggressive strategy that's worth it for really high net worth guys, not some piker living in LA making a few hundred Ks in cap gains per year

 

Maybe one day it can be worth pursing for me... one day...

 

Ha, I was thinking the same thing, maybe one day... My main concern is trying to protect my W2 and 1099 income. 

 

I have read about real-estate professional status, that allows you within certain limits to deduct depreciation against ordinary income. There are certain IRS tests to get the designation, that personally for me would be hard to meet. But I have partners that have had their spouse do it, and then the combined return can benefit from it. 

[charlieruane]

Well, if you're married and your estate will at least modestly exceed $28mm in 2025 dollars indexed for inflation, it's a game-changer. So, yeah, quite wealthy.

 

The "basic" zeroed-out GRAT maneuver isn't considered very aggressive at this point, it's settled law and good estate lawyers will know about it. The note swaps are aggressive if used to excess. 

 

Smaller estates (and estates of the size I mentioned) have lots of low-hanging-fruit strategies to deploy, e.g. annual gifting up to the exemption, paying for grandkids' private educations, paying for family members' health insurance... the list goes on. 

Edited September 2, 2025 by charlieruane

[charlieruane]

Well, GRATs work well above $28mm, but there are also SLATs, FLPs, life insurance trusts... though we'll quickly hit the limit of my knowledge on those. Lots of law/tax firms have good summaries of the basics online, though. 

[Munger_Disciple]

12 hours ago, charlieruane said:

Well, GRATs work well above $28mm, but there are also SLATs, FLPs, life insurance trusts... though we'll quickly hit the limit of my knowledge on those. Lots of law/tax firms have good summaries of the basics online, though. 

 

For singles, they work well for estates above $14mm.....

[Grafter]

Yeap, over the taxable estate limit, there are lots of tools, depending on the situation.  Usually fall into one of the following camps: sqeeuze (such as using family limited partnership and attempting to maximize valuation discounts, such as minority interest or liquidity discounts), freezing (to freeze asset valuation and getting future appreciation outside of the estate, such as with grats, Idgt, and other trust or entities) and burning (spending down, such as maxing out annual gifting limits and paying for things outside of gifting limits).

[charlieruane]

3 hours ago, Munger_Disciple said:

For singles, they work well for estates above $14mm.....

 

Indeed!