A grantor retained annuity trust and grantor retained unitrust are two types of trusts commonly used in estate planning. Both affect the amount of death taxes you might pay if you pass the threshold, and both work to save your estate money. Both can be part of a plan to minimize taxes on transfers of large amounts of wealth to the next generation.
Grantor Retained Annuity Trust (GRAT)
A grantor retained annuity trust minimizes the taxes on gifts to family members. It is an irrevocable trust with a term limit. The grantor transfers assets to the trust and files a gift tax return based on a calculation made using the term of the trust, value of the gift, and the Internal Revenue Service’s specified rate. The trust pays the grantor an annuity every year that is either a fixed dollar amount or a fixed percentage of the initial value of the trust. Once the trust expires, the beneficiary receives the balance of the assets in the GRAT.
A GRAT is commonly used to minimize tax liabilities. GRATs are frequently used by persons who have assets that should outperform the IRS assumed rate of return that can be transferred to the trust to freeze the value of the assets for estate tax purposes. If the grantor dies prior to the expiration of the trust the anticipated gift and estate tax savings are not achieved because the remainder interest will be included in the grantor’s estate.
Grantor Retained Unitrust (GRUT)
A grantor retained unitrust is another option that can help to reduce taxes levied on an estate. Similar to a GRAT, the trust is irrevocable and is for a limited period of time and the grantor transfers assets to the trust and files a gift tax return for the remainder interest; however, in a GRUT, the grantor receives a fixed percentage of the trust’s assets annually based on the fair market value of the trust. Thus, the amount of the annual payment changes as the fair market value of the assets change. At the end of the term, the beneficiaries receive the assets with a gift or estate tax savings realized.
GRATs and GRUTs are not the right answer for every client. There are other considerations that include: the loss of control of the assets, the irrevocability of the trust, and income taxes, to name a few. There are many types of trusts that might benefit you and your heirs. Contact Grissom Law, LLC to discuss your needs and learn which trust is best for your situation.
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