Estate Planning Tool: the Grantor Retained Annuity Trust

A Grantor Retained Annuity Trust (GRAT) is an irrevocable trust into which the grantor (creator of the trust) transfers assets and retains the right to receive payment of a fixed dollar amount through an annuity for a specified term of years (GRAT term). At the end of the GRAT term, the GRAT’s remaining assets pass, tax free, to designated beneficiaries.
The IRS assumes that a GRAT will grow at a rate (the “7520 rate”) set at the time the trust is established. The IRS does not look at the actual growth of the assets; therefore growth surpassing the assumed rate can be passed on to trust beneficiaries gift and estate tax free. The 7520 rate is important to determining the potential amount that may be passed tax free to beneficiaries on the termination of the trust. The lower the rate, the larger the potential tax free gift. With interest rates at historic lows, the GRAT can be a great wealth transfer tool in certain circumstances.

There is a good deal of analysis that goes in to structuring the GRAT term.  Life expectancy, health conditions, the current 7520 rate, and the size an estate are all considerations impacting the structure of the trust. To discuss whether this is a tool that should be incorporated into your estate plan, contact our office to meet with an attorney.

  Contributed by Morris Hall, PLLC Phoenix and Prescott Estate Planning Attorney, Andrea L. Claus.

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This blog should be used for informational purposes only.  It does not create an attorney-client relationship with any reader and should not be construed as legal advice.  If you need legal advice, please contact an attorney in your community who can assess the specifics of your situation.