Grantor Retained Annuity Trust (GRAT) | Cornetet, Meyer, Rush & Stapleton

Why would you need this type of Trust?

A Grantor Retained Annuity Trust (also known as a GRAT) is used to transfer assets from one generation to the next without using a meaningful amount of the lifetime gift tax exemption/estate tax exemption.

A GRAT is a statutory device where you make a transfer and, in return, receive a stream of annuity payments. The calculation of the annuity payments is based on the interest rate at the time of the transfer under IRC 7520 rate.

The hope is that the property transferred appreciates at a rate greater than the payments back of the annuity. By making a transfer in exchange for an annuity stream, most likely the gift value will be zero (or close to zero) if you outlive the annuity stream. It might be best to have some gift tax to file a return and start the statute of limitations.

At the conclusion of the term of the GRAT, the remaining assets will go to children with no further tax imposed.

Is it irrevocable or revocable?

The GRAT is irrevocable, meaning once it is created it cannot be changed.

Is a gift tax return required?

Yes, if there is a taxable gift made when the GRAT is created.

Is a separate tax identification required?

No, the grantor can continue to pay the income produced on the GRAT for the benefit of children for the rest of his or her life.

Is this subject to estate tax upon my death?

The assets that are returned to you are subject to estate tax upon death. The assets that remained in the GRAT passed to your children and are not subject to estate tax or gift tax.

Is there creditor protection?

There is no creditor protection for the grantor during the term of the GRAT, but there is creditor protection for the remainder beneficiaries after the conclusion of the GRAT term.

What assets can be placed in this type of Trust?

Generally, you would place assets into a GRAT which will exceed the appreciation under the IRC 7520 rate.

Advantages of using a GRAT:

Annuity payments provide income stream to the grantor
Generally, risk-free from an estate tax perspective
Grantor pays income tax on trust income, leaving more assets in the GRAT for remainder beneficiaries
Valuation adjustments increase effectiveness of sale for estate tax purposes

Disadvantages:

Grantor may not outlive the GRAT term and the appreciated assets are included in the estate.
No basis “step-up.”
Risk that the rate of return will not exceed the 7520 rate.

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