Grantor Retained Annuity Trust (GRAT) & Grantor Retained Unitrust
(GRUT)
A grantor gifts his/her intangible personal property into a Trust for a
specified period of time or term during which the grantor receives a certain
amount of the income. After the term has passed, the intangible personal
property is no longer includible in the grantor’s estate and passes directly
to the remaindermen. The income amount is determined by either an annuity
or a unitrust calculation.
Annuity
A grantor retained annuity Trust pays an annuity
to the income beneficiary(ies) of either a specific dollar amount or a
percentage of the initial fair market value of the Trust for the beneficiaries’
life or a term certain.
Unitrust
A grantor retained unitrust pays a fixed percentage
of its fair market value at least annually to the income beneficiary(ies)
for the beneficiaries’ life or a term certain.
Gift tax consequences
The assets are valued for gift tax purposes at the remainder interest (using
IRS actuarial tables and the AFR rate at the time of the gift). Generally,
the higher the AFR, the lower the remainder interest. In effect, the value
of the assets aredecreased by the grantor’s income
interest. The income interest qualifies for the annual gift tax exclusion.
Estate tax consequences
When the grantor dies prior to the lapse of the term - The value
of the trust is included in the grantor’s estate. However, if the grantor
only retained a right to a portion of the income from the Trust, then only
a proportionate share of the Trust would be includible.
When the grantor dies after the lapse of the term
- The Trust ceases being a grantor trust. The grantor’s interest in the
property lapses and therefore, the Trust is not included in the grantor’s
estate.
Generation-Skipping Transfer Tax consequences
If the grantor assigns remaindermen who are skip
persons, generation skipping transfer tax will be imposed at the end of
the grantor’s term.
Federal income tax consequences
Federal income taxation depends on whether the GRAT is written as a grantor
trust or not. If it is written as a grantor trust during the grantor’s
life or the trust term, the grantor is taxed as a grantor with all income,
expenses and gain/loss. If it is not a grantor trust, the grantor is taxed
with income according with a tiered system set forth in IRC Section 664.
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