How to Get the Most Out of A Grantor Retained Annuity Trust
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by: SchneiderLawOR
Word Count: 2423
Date: Tue, 17 Jan 2012 Time: 7:08 AM
Given the typically high rate of both gift taxes and estate taxes, the grantor retained annuity trust, or GRAT, has become a popular estate planning option over recent years. Although the rules for a GRAT are complex and ever-changing, the basic concept is simple enough to understand.
A GRAT, like other trusts, begins with a grantor who must nominate a trustee and designate both beneficiaries to receive the benefits of the trust, and assets to fund the trust. Unlike some other types of trusts, however, a GRAT also requires the grantor to decide when the trust will terminate. A GRAT must be created for a specific number of years. At the end of the specific life of the trust, the assets remaining in the trust will be transferred to the beneficiaries. In addition to deciding the duration of the trust, the grantor must decide how much to receive in the annual retained annuity interest payments. Also unlike other trusts, a GRAT pays the grantor back an yearly annuity payment each year as a fixed amount or as a percentage of the total trust assets.
A number of factors go into getting the most out of a GRAT. When constructed properly, a GRAT can help avoid the payment of both gift and estate taxes. One key factor to take into consideration is that the grantor must survive the trust. If the grantor dies before the trust duration expires, all trust assets are returned to the grantor’s estate and all tax advantages are lost. Although there is no way to guarantee that you will survive the trust, knowing this risk ahead of time can help you decide on a trust duration.
Another important factor to consider when creating a GRAT is what assets to use to fund the trust. Although the rules relating to GRAT assets are complicated, they can be summed up as follows. The IRS sets the “assumed rate of return” each month. When an asset performs above the set assumed rate of return, the additional earnings can be transferred to beneficiaries tax-free. In addition, any gift taxes due on the assets transferred to the beneficiaries are determined by subtracting the present value of the retained annuity from the value of the assets contributed to the GRAT.
Given the complex nature of a GRAT, consultation with your estate planning attorney is recommended to determine if a GRAT is right for you.
About the Author
Experienced estate planning attorneys Portland OR of the Law Offices of Richard B. Schneider LLC offers estate planning and business planning resources to residents of Portland OR. To learn more about these free resources, please visit www.rbsllc.com today.
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