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Using Grantor Retained Annuity Trusts as Part of Estate Planning

On Behalf of | Jan 20, 2021 | Estate Planning |

There are a number of strategies that can be used in estate planning to reduce tax consequences. A grantor retained annuity trust (GRAT) is an instrument that can potentially allow a person to transfer wealth to the next generation with minimal or no gift tax ramifications. With interest rates as low as they are, now is an opportune time to consider using a GRAT. If it is structured correctly, a substantial amount of assets can be passed down to beneficiaries without utilizing your lifetime gift tax exemption.

A GRAT is a type of irrevocable living trust that can be beneficial for those who face significant estate tax liability. It temporarily holds assets that will likely rise in value, allowing the grantor (creator) to make an initial contribution to the trust while retaining the right to receive an annual annuity payment during the term of the GRAT. The rate of the generated return is specified by IRS regulations.

A GRAT freezes the value of an estate asset by transferring its future appreciation to the beneficiary. For instance, if you had $20 million in assets that you expected to grow to $30 million within the next two years, the difference would be transferred to the trust beneficiaries without them incurring tax liability. Since a GRAT doesn’t represent a completed gift, but rather provides for future appreciation, there’s no gift tax due. However, the transfer must still be reported on a gift tax return.

The term of a GRAT is typically two to five years. Once the trust term expires, the beneficiary receives the appreciated value of the assets of the trust, tax-free. If the grantor passes away during the term of the trust, the assets go back into the taxable estate and the beneficiary doesn’t receive anything.

The instrument can be particularly useful in estate planning for high net-worth individuals, people who own shares in startup companies and anyone else with stocks or assets they expect to rise in value above the IRS assumed rate of return. Other than the risk that the GRAT could grow at a rate lower than the IRS rate, there’s virtually no downside to creating a GRAT.

Trusts can be complex and it’s vital to have the guidance of a knowledgeable estate planning attorney who can advise you concerning the best strategies for you and your family. The legal team at Bottimore & Associates, P.L.L.C. has two decades of experience helping clients throughout Washington create comprehensive estate plans. Call 253-272-5653 or contact us online to schedule a consultation at our Tacoma office.