What is a Grantor Retained Annuity Trust?
Grantor retained annuity trusts (GRAT) is an estate planning tactic in which a grantor locks assets in a trust from which they earn annual income. Upon expiry, they receive the assets tax-free. GRATS are used by wealthy individuals and startup founders to minimize tax liabilities.
Who pays income tax on a GRAT?
GRATs are taxed in two ways: Any income you earn from the appreciation of your assets in the trust is subject to regular income tax, and any remaining funds/assets that transfer to a beneficiary are subject to gift taxes.
Are annuity payments from a GRAT taxable?
At the end of the GRAT term, the remainder will transfer to your beneficiaries. This transfer will have no effect on your estate tax and will not be taxable to your beneficiaries. The one exception to this rule is if you pass away during the GRAT term, before all annuity payments have been made.
Are GRATs revocable or irrevocable?
A grantor retained annuity trust, better known as a GRAT, is an irrevocable trust that pays an annuity amount to the grantor for a set period of years, after which the remainder passes to or for the benefit of children or others.
Who should use a GRAT?
GRATs work best when interest rates are low, which lowers the IRS Section 7520 hurdle rate. Low rates make it easier for the growth of trust assets to outpace the Section 7520 rate and provide the best outcome the grantor is able to get more appreciation out of their estate and give a larger amount to heirs.
How does an Ilit work?
An irrevocable life insurance trust (ILIT) is created to own and control a term or permanent life insurance policy or policies while the insured is alive, as well as to manage and distribute the proceeds that are paid out upon the insured’s death.
Does a GRAT require a tax return?
With respect to income taxes, the grantor is treated as the owner of the assets during the GRAT term and reports all income earned by the GRAT on his individual income tax return. To avoid having to file its own fiduciary income tax return, the GRAT should not apply for a separate taxpayer identification number.
What happens when a GRAT ends?
The annuity amount is paid to the grantor during the term of the GRAT, and any property remaining in the trust at the end of the GRAT term passes to the beneficiaries with no further gift tax consequences.
How long can a GRAT last?
The minimum duration for a GRAT is two years, and that is a very popular choice for many clients. But longer GRATs are also common, and some clients decide to establish GRATs that last 3, 5 or 10 years.
Can a trust be the beneficiary of a GRAT?
Usually, the beneficiaries of a GRAT are the grantor’s children or a trust for their benefit. If a trust is a beneficiary, the terms of the trust will determine when the beneficiaries receive distribution of the trust assets.
Is a GRAT a completed gift?
As this is a gift of a future interest, it is not a completed gift and does not qualify for the annual gift tax exclusion. Any appreciation in excess of this amount will transfer to the grantor’s children free of gift tax consequences.
How do I report a GRAT gift?
Although there is no gift tax due, you need to file a gift tax return (Form 709) reporting the transfer of property to the GRAT at the same time you file your 2020 income tax return. Either we or your accountant will prepare the gift tax return.
How do grantor trusts work?
According to the IRS, a grantor trust is one in which the grantor (the person establishing the trust) retains control over trust’s income and assets. With this type of structure, the income from the trust is taxed to the grantor, not the trust itself.
Who can be trustee of GRAT?
The Settlor may be the Trustee of the GRAT during the annuity term unless cer- tain voting stock is used to fund the GRAT.
Can a trust buy an annuity?
The trust can own the policy and be the listed beneficiary. You have the option of using your own funds to purchase the annuity, which is then owned by the trust, or putting funds in the trust that the trust uses to purchase the annuity against your life.
Why would you use a GRAT?
Grantor Retained Annuity Trust Uses
GRATs are most useful to wealthy individuals who face significant estate tax liability at death. … That means more money can be passed to children while not eating into the grantor’s lifetime exemption from estate and gift taxes.
Can the grantor be the trustee of a GRAT?
The grantor can serve as trustee or appoint someone else to manage the trust assets. Beneficiaries are also named in the trust document. However, the grantor also receives a benefit from the trust.
How do you set up GRAT?
When setting up a GRAT, there are four key considerations:
- The length of the trust’s term.
- The assets you want to place in it,
- Current rate of return the IRS uses to calculate the trust’s annuity payments.
- The beneficiary of the remainder (an individual or another trust).
Can a beneficiary of an Ilit be the trustee?
Can a Beneficiary Be the Trustee of an ILIT? From a legal perspective, there is no impediment to a beneficiary of an ILIT also being the Trustee of the trust.
Should an Ilit be a grantor trust?
Usually, yes. Most ILITs are grantor trusts since these trust instruments typically provide that income may be applied toward the payment of premiums on policies insuring the grantor’s life (or the grantor’s spouse’s life).
Can an Ilit be terminated?
Termination. An irrevocable trust generally can’t be terminated. But under certain circumstances, an ILIT can be terminated with the assistance of an attorney. Some states require judicial intervention to terminate an ILIT.
Can you put a house in a GRAT?
A GRAT Can Hold Virtually Any Asset Type
In addition to potentially high performing real estate, virtually any type of asset can be transferred into a GRAT which you think will outperform the annuity interest rate over the long term.
How are grat annuity payments calculated?
This payment is calculated as one-half of the initial contribution or $500,000, plus the IRS assumed rate of return (in this case, $28,680). At the end of Year 2, the Grantor will receive an annuity payment of $528,680.
Can GRAT annuity payments be made in kind?
The annual payments from the GRAT to the grantor can be made in cash or by in-kind distributions of GRAT assets. If the annuity payments are in kind, the property is revalued at the date of each payment to determine the portion of the property required to make such payments.
How do you zero out a GRAT?
To implement this strategy, you zero out the grantor retained annuity trust by accepting combined payments that are equal to the entire value of the trust, including the anticipated appreciation. In theory, there would be nothing left for the beneficiary if the trust is really zeroed out.
Can a GRAT be terminated early?
Thus, the trustee cannot terminate the GRAT before expiration of the term of the grantor’s qualified interest by distributing to the grantor and the remainder beneficiaries the actuarial value of their term and remainder interests, respectively.
What does Ilit mean?
An irrevocable life insurance trust (ILIT) is a trust that cannot be rescinded, amended, or modified, post creation. ILITs are constructed with a life insurance policy as the asset owned by the trust.
Are cruts revocable?
A charitable remainder unitrust (known as a “CRUT”) is an irrevocable trust created under the authority of Internal Revenue Code § 664 (“Code”). … The remainder (the amount expected to go to charity) must be at least 10% of the fair market value of the assets contributed to the CRUT.