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The Complete Guide to Grantor Retained Annuity Trusts

By Estate Planning, Resource, White Paper

Sophisticated Estate Planning with GRATs

Grantor retained annuity trusts (GRATs) provide a solid foundation for long-term estate and legacy planning. This financial instrument is a great way to minimize wealth transfer taxes and maximize the efficiency of your estate planning model. GRATs present a real and robust opportunity to freeze value and transfer appreciating assets to the next generation while minimizing the consequences of gift and estate taxes.

A GRAT is a type of irrevocable trust created for a set time period, with taxes paid upon the creation of the trust in order to avoid future costs. An annuity is paid out every year, with this fixed income stream often used to fund retirement. When the trust expires, the beneficiary receives the assets of the trust on a tax-free basis.

Synopsis

In this white paper, you will gain knowledge on the wide range of benefits that GRATs have to offer with little downside in most situations. Individuals and families often use these instruments to freeze and transfer value, with GRATs enabling the provision of large financial gifts within the family structure. Common GRAT types include fixed-term GRATs, ramp-up GRATs, zeroed-out GRATs, rolling GRATs, and Walton GRATs.

1 - How is a GRAT defined?

A GRAT is created when a grantor contributes and transfers assets to an irrevocable trust on a fixed-term basis. This type of trust cannot be modified, amended, or terminated without the permission of the grantor’s named beneficiaries or court approval. GRATs offer dual benefits in most situations, with long-term asset appreciation and distribution combined with the right to receive an annuity stream over the term of the trust.

In a typical situation, all assets included in the trust are distributed to family members, with other non-charitable and charitable beneficiaries also defined in some situations. Assets are contributed to the trust, with the original value of the assets earning a rate of return for the grantor, and leftover assets given to the grantor’s beneficiaries upon expiry of the trust. A GRAT enables multi-generational wealth transfer for a set amount of time with little or no gift taxes.

In order to understand how a GRAT functions, it's important to understand the following terms:

A GRAT enables multi-generational wealth transfer for a set amount of time with little or no gift taxes.

Annuity

A financial product that pays out a fixed stream of payments over a set time period. In a GRAT, annuity payments come from interest earned or as a percentage of the total value of the assets.

Appreciating Assets

Property or other valuable assets that are likely to appreciate in value between family generations.

Taxable Gifts

A sum calculated by subtracting the value of the grantor’s retained interest from the fair market value of the appreciated asset transferred into the trust.

2 - Implementing a GRAT in 5 simple steps

STEP 1

An irrevocable grantor trust is created.

The purpose of this trust is to exclude particular assets from estate and gift taxes, while including them for income tax purposes. Assets have been removed from the estate, and the grantor can buy and sell from the trust without incurring income taxes.

STEP 2

Assets are transferred to the trust in exchange for an annuity.

The annuity must be for a fixed term or for the entire lifetime of the grantor. Assets inside the trust are… download the white paper to continue reading.

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Disclaimer: The information in this article is for general purposes only, and it is not intended as a substitute for legal advice.