It sounds like a character from the movie Guardians of the Galaxy, but it’s not. No, GRAT stands for Grantor Retained Annuity Trust (GRAT). For some, this type of trust can make a big difference in how wealth is transferred to the next generation. Read on to learn more about GRATs.
A Typical Trust
Trusts generally consist of:
- The grantor, who creates and funds the trust;
- The trustee, who manages trust assets;
- Assets used to fund the trust; and
- At least one beneficiary.
The structure of a GRAT is slightly different, though.
Anatomy of a GRAT
Like any other trust, a grantor creates and funds the trust, which is an irrevocable trust. The grantor can serve as trustee or appoint someone else to manage the trust assets. Beneficiaries are also named in the trust document. However, the grantor also receives a benefit from the trust.
The GRAT is set up to exist for a certain period of time. During that term, the grantor receives an annuity based on a percentage of either the interest earned on the trust assets or the value of the trust assets.
When it is time to terminate the trust, the beneficiaries receive the remaining trust assts. While most other trusts distribute trust assets upon the grantor’s death, GRATs do not.
If the grantor passes away before the termination of the trust, the remaining trust assets are not given to the named beneficiaries. Instead, they become part of the grantor’s taxable estate.
This sounds risky. So, why would anyone want to set up a GRAT?
This type of trust is often used to reduce estate tax liability levied upon the grantor’s death. Other reasons to use a GRAT include:
- Transferring shares in startup companies that appreciate at a higher value than the IRS 7520 interest rate,
- Passing wealth to children without reducing the grantor’s lifetime exemption from estate and gift taxes,
- Minimizing taxes on large financial gifts to family.
Although GRATs are a gamble, they can be an effective tool under the right circumstances.
Talk to an Attorney First.
Knowing which trust is best for you and how to set it up without irritating the IRS is tricky. Consult with an attorney before establishing any trust.
At Virtus Law, we can help you develop an estate plan that meets your needs. Contact us by calling 612.888.1000 or by emailing us at firstname.lastname@example.org. Our main office is in Minneapolis, with other offices located in Maplewood, Cambridge, Edina, Mendota Heights, and Red Wing.