The person who forms a trust is called the “Grantor.” So, every trust has a Grantor. But, not every trust is a Grantor Retained Annuity Trust.
A Grantor Retainer Annuity Trust is an Irrevocable Trust where the Grantor transfers assets to the Trust but in exchange receives back an Annuity. Thus, the Grantor “Retains” the Annuity.
A Grantor Retained Annuity Trust, or GRAT, is an attempt to use the Irrevocable Trust to remove assets from the Grantor’s estate without triggering the Gift Tax.
Typically, the Grantor forms an Irrevocable Trust into which the Grantor transfers assets, but the Grantor retains an annuity from the trust for some term of years. Though the trust is given an asset, by following the rules set up by Congress and the IRS, the value of the gift can be equal to the value of the annuity taken back. So, for Gift Tax purposes, the transfer is a wash. $X is given to the trust in exchange for an annuity valued at $X.
The Trustee invests the asset, trying to maximize income. Each year the Grantor receives the annuity payment. If the Trustee happens to invest at a rate of return exactly the same as the government projection, then the final annuity payment will bring the trust’s assets to zero. But, if the trust assets outperform the projections, the Grantor is paid in full, but the trust has a remainder. This remainder amount passes to the beneficiaries or continues in a Dynasty Trust, Gift Tax and Estate Tax-free sheltered from creditors and divorce.
Here are some questions clients, beneficiaries, and Trustees ask:
Yes, the beneficiary is the person who benefits from what remains at the trust’s completion. You have many choices; we can craft the GRAT to meet your particular situation.
Yes, you are free to name the Trustee of your choice.
Certainly, you can have co-trustees in a GRAT.
Yes, a Protector is an excellent addition to any GRAT.
If you die before the end of the GRAT term, the assets are still included in your estate.
Yes, a typical plan is to have the remainder pour into a Dynasty Trust, making the funds available for your descendants, but protecting the assets from their creditors and divorces.
If you have any questions about Grantor Retained Annuity Trusts or any other estate planning topics, please contact us to schedule a free consultation. For more than two decades Klenk Law has focused only on Estate Law. We’ve seen it all, and this experience allows us to explain complex estate law and planning techniques clearly and concisely. We make it easy for you to understand GRATs so you can make the best decisions for yourself and your family.