Grantor Retained Annuity Trust (GRAT)
A Grantor Retained Annuity Trust, or GRAT, is an Advanced Estate Planning tool that allows high net worth clients to avoid estate tax liability for assets which are likely to appreciate, in certain situations.
GRATs are special kinds of irrevocable trusts (trusts that cannot be modified or revoked by the Grantor) that allow clients to transfer property into the trust and receive an annual annuity payment from the trust for a term of years. When the term of the GRAT has ended, the property in it is transferred to the beneficiaries named at its creation.
…the annuity payment rate that is calculated by the IRS each year is frequently lower than the rate of appreciation of the assets placed into the GRAT.
The reason why clients may wish to use a GRAT is because the annuity payment rate that is calculated by the IRS each year (this is referred to as the Section 7520 rate) is frequently lower than the rate of appreciation of the assets placed into the GRAT.
This is a benefit to clients using GRATs, because the value of the property going to the beneficiaries when the GRAT is over is reduced by the amount paid to the grantor, meaning that if the assets appreciate at a rate equal to or greater than the IRS rate, the tax value of that property will be close to zero upon transfer.
GRATs aren’t for everybody. Like most Advanced Estate Planning solutions, a seasoned Estate Planning attorney such as those at Bezaire, Ledwitz & Borncamp should be consulted to see if a GRAT is right for your Estate Planning situation.
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