With a GRAT, also known as a Grantor Retained Annuity Trust, you can transfer property or assets to the trust and receive an annual, fixed annuity from the trust. Assuming you do not die before the end of the trust term, the remainder of the assets in the trust will transfer estate-tax free to the trust beneficiary. However, should you die before the end of the trust term, the assets will remain a part of your estate and be subject to estate taxes.
A Grantor Retained Unitrust, also known as the GRUT, is very similar to the GRAT. The only difference is that the income received by the trust owner varies each year. The amount is determined as a fixed percentage of the trust's assets, valued each year. The same rules apply to estate taxes on the remainder of the trust, depending on whether the grantor dies before or after the term of the trust.
Family members may also wish to consider using a Qualified Personal Residence Trust (QPRT) by transferring a primary or vacation residence to the trust. The grantor retains ownership interest so he may live in the residence. However, he must also pay property tax and may receive any relevant tax deductions that accompany ownership of the property.
All three types of trusts are designed to allow the grantor the right to retain income in the transferred asset or property until the end of the trust term, often ten years. During that time, the income produced by the trust is taxed to the grantor.
The balance of the trust assets, once the income has been fully paid out, constitutes the gift to others. These trusts allow substantial savings in both gift and estate taxes, as long as the grantor outlives the term of the trust.
The term of the trust is very important, as the GRAT, GRUT, and QPRT all lose their estate tax advantages should the grantor die ahead of schedule. On the flip side, however, the assets, as well as any appreciation during the trust term that is not paid out as income to the grantor, are passed onto the beneficiary free of estate taxes.
This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or as a determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on their objectives, financial situations, and particular needs. This article is not designed or intended to provide financial, tax, legal, accounting, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought.