Grantor-retained Annuity Trusts (GRATs)

This type of irrevocable trust is often set up to enable a person to make substantial financial gifts to selected family members without being subject to the gift tax.

After the assets are placed into the trust, a gift value is calculated that represents the initial principal value plus the current theoretical interest (determined by the Internal Revenue Service) minus the total value of annuity payments that will be made during the trust term. The grantor then receives annuity payments each year for the entire term of the trust. Any remaining value at the end of that term passes to the beneficiaries as a gift.

Benefits

If the actual interest earned at the end of the trust term is higher than the IRS theoretical interest (as may be the case when volatile assets are involved), the remaining value that goes to the beneficiary is not subject to the gift tax.

Cautionary notes

• Anyone designated as a GRAT beneficiary may not also be named a beneficiary of a grantor-retained income trust (GRIT), a similar financial instrument where beneficiaries receive funds from the income-producing asset directly (for example, a steady stream of rental income from a commercially leased property).
• If the grantor dies before the trust term ends, the GRAT assets will be considered part of the estate, meaning the potential benefits of avoiding the gift tax will be lost.

Descriptions of trusts are intended to be informational and are not specific recommendations. Contact a trust officer at Sterling Trustees for more detailed information on what would be best suited to your circumstances.