What is a Grantor Retained Annuity Trust? It is an irrevocable trust that has been established for the sole benefit of the grantor. The grantor maintains ownership and control over assets in this type of trust, but he or she also receives income from them as well. In addition to providing asset protection, GRATs can help reduce estate taxes for those who have significant assets they want to protect from being taxed heavily at their death.
What Is a Grantor Retained Annuity Trust (GRAT)?
A grantor retained annuity trust (GRAT) is a tax-reduction tool in estate planning that allows family members to avoid paying taxes on large financial transfers. An irrevocable trust is established for a pre-determined period of time. When the trust is formed, the creator pays a tax. Assets are placed under the trust, and an annual payment (annuity) is made thereafter. The beneficiary obtains the assets tax-free when the trust terminates.
How Grantor Retained Annuity Trusts (GRAT) Works
A grantor retained annuity trust is an irreversible gift trust in which a person or entity can pass on significant assets to the next generation without incurring any gift tax. GRATs have a specified duration.
A grantor contributes assets to the trust and keeps the right to receive them back later. When the GRAT’s term is over, any appreciation and the IRS-assumed return rate (7520 rate) are given to the grantor’s beneficiaries.
The annuity payments are paid out of interest earned on the trust assets or a proportion of the entire value of the assets. If a person who creates a grantor retained annuity trust dies before it expires, the assets become part of that individual’s taxable estate, and the beneficiary receives nothing.
How Grantor Retained Annuity Trust Are Used
GRATs are most beneficial to wealthy people who have a large inheritance tax obligation at death. A GRAT may be utilized to lock in the value of their estate by moving part or all of the appreciation onto their heirs.