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 grantorís estate and passes directly to the remaindermen. The income amount is determined by either an annuity or a unitrust calculation.
 
Annuity
Unitrust
Gift tax consequences
Estate tax consequences
Generation-Skipping Transfer Tax consequences
Federal income tax consequences
 

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 beneficiariesí 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 beneficiariesí 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 grantorís 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 grantorís 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 grantorís interest in the property lapses and therefore, the Trust is not included in the grantorís 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 grantorís 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 grantorís 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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