A grantor retained annuity trust (GRAT) is a financial instrument used in estate planning to minimize taxes on large financial gifts to family members. Under these plans, an irrevocable trust is created for a certain term or period of time. The individual establishing the trust pays a tax when the trust is established.
What happens when a GRAT terminates?
The annuity amount is paid to the grantor during the term of the GRAT, and any property remaining in the trust at the end of the GRAT term passes to the beneficiaries with no further gift tax consequences. If the grantor lives out the term, the remainder passes to the beneficiaries without any additional transfer tax.
How are GRAT annuity payments calculated?
This payment is calculated as one-half of the initial contribution or $500,000, plus the IRS assumed rate of return (in this case, $28,680). At the end of Year 2, the Grantor will receive an annuity payment of $528,680.
What’s the maximum term of a grantor retained income trust?
10 years
For example, a grantor transfers a personal residence into trust and retains the right to live there for a term of 10 years.
How long can a GRAT last?
The minimum duration for a GRAT is two years, and that is a very popular choice for many clients. But longer GRATs are also common, and some clients decide to establish GRATs that last 3, 5 or 10 years. The choice of an optimal GRAT term is driven by several factors.
What is the maximum length of time that a trust can last?
A trust can remain open for up to 21 years after the death of anyone living at the time the trust is created, but most trusts end when the trustor dies and the assets are distributed immediately.
How does a grantor retained annuity trust work?
Under a grantor retained annuity trust, the annuity payments come from interest earned on the assets underlying the trust or as a percentage of the total value of the assets. If the individual who establishes the trust dies before the trust expires the assets become part of the taxable estate of the individual, and the beneficiary receives nothing.
How does a rolling grat annuity trust work?
The initial distributions roll into subsequent trusts (rather than being returned to the grantor), and the grantor receives larger distributions in the final years of the cumulative term. Here’s an example of a rolling-GRAT strategy. In this example, an individual sets up a series of nine two-year rolling GRATs.
How does an annuity work in a trust?
This common trust strategy requires that the grantor give up control of the assets for the term of the trust while receiving a regular annuity payment, and the appreciation on the trust assets may pass to heirs free of gift or estate taxes.
When do you pay tax on an annuity?
The individual establishing the trust pays a tax when the trust is established. Assets are placed under the trust and then an annuity is paid out every year. When the trust expires the beneficiary receives the assets tax-free.
