Grantor-retained annuity trust (GRAT) is an estate planning tool often used by wealthy individuals to minimize or defer the amount of estate taxes owed upon their death. A GRAT is an irrevocable trust created by the grantor which pays out a fixed annuity, usually over a period of several years, with any money left over going to the intended beneficiary upon its expiration. The grantor retains the rights to the income generated by the trust and may use it as he or she wishes.
How Does GRAT Work?
When creating a GRAT, the grantor will create an annuity that will pay out over the period of the trust. They’ll put money into the trust, up to the amount of their annual federal estate tax exemption, and then gift assets to the trust that will appreciate in value in the future, such as stocks or real estate. This money will be used to pay out a regular annuity amount over the term of the trust, say five years. At the end of the term, any assets that remain in the trust that have increased in value since being gifted will go to the intended beneficiary and will not be subject to estate or gift taxes.
The Benefits of GRAT
The primary benefit of grantor-retained annuity trusts is that they are a way for wealthy individuals to reduce the amount of estate taxes they owe, ultimately preserving their financial legacy for future generations. Additionally, it gives the grantor the freedom to use the rights to the annuity, whether that’s for their own benefit or that of their family. The trust can also be structured to provide tax-free distributions to beneficiaries.
Wrapping Up Grantor-Retained Annuity Trust
Grantor-retained annuity trust is a way for wealthy individuals to limit their estate taxes and protect their financial legacy. It is an irrevocable trust with a fixed annuity that pays out over a determined period of time with any money left over going to the intended beneficiary upon the trust expiration. The grantor is allowed to use the rights to the annuity as they wish, giving them added flexibility and tax-free distributions can be granted to beneficiaries.