A GRAT is a type of trust that consists of two distinct terms: (i) a term of years (the GRAT term) during which the grantor of the GRAT receives an annuity payment based on the IRS rate in effect during the month the GRAT is created, and (ii) the remainder term, which is the period of time after the end of the GRAT …

How is a GRAT taxed?

How Are GRATs Taxed? 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?

In other words, during the initial term of the GRAT (the term that the Grantor is to receive the annuity payments) the Grantor will be taxed on all of the income earned by the GRAT during each such year, including capital gains.

What do you put in a GRAT?

When choosing assets, we consider the amount of money you hope to give away, and the growth potential of those assets. Stocks, interest in a family business, and other assets with high appreciation potential are good candidates for use in a GRAT.

What is the purpose of a GRAT?

A grantor retained annuity trust (GRAT) is a financial instrument used in estate planning to minimize taxes on large financial gifts to family members. Under these plans, an irrevocable trust is created for a certain term or period of time. The individual establishing the trust pays a tax when the trust is established.

Can a spouse be a beneficiary of a GRAT?

One advantage of retaining the property in trust is that the grantor’s spouse can be a beneficiary, thereby permitting the couple to have some access to the property during the spouse’s life and causing the trust to continue to be a grantor trust.

What happens at end of GRAT?

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. If the grantor lives out the term, the remainder passes to the beneficiaries without any additional transfer tax.

When should you set up a GRAT?

A GRAT is created when a grantor contributes assets with appreciation potential to a fixed-term, irrevocable trust. The grantor then retains the right to receive an annuity stream over the trust’s term.

Is a GRAT an IDGT?

Unlike the IDGT, the GSTT for a GRAT is measured at the end of the annuity term. Therefore, all of the asset’s appreciation that occurs during the annuity term is counted against the grantor’s GSTT exemption.

What GRAT means?

-grat- comes from Latin, where it has the meaning “pleasing; thankful; favorable. ” This meaning is found in such words as: congratulate, grateful, gratify, gratis, gratitude, gratuitous, gratuity, ingrate, ingratiate, ingratitude.

What is the rate of return on a GRAT?

GRATs are established for a specific number of years. When creating a GRAT, a grantor contributes assets in trust but retains a right to receive (over the term of the GRAT) the original value of the assets contributed to the trust while earning a rate of return as specified by the IRS (known as the 7520 rate ).

Are there any downsides to using a GRAT?

There are, however, two downsides to using a GRAT: The assets transferred into the GRAT could grow at a rate lower than the section 7520 rate. If this is the case, then the trustmaker/grantor will simply receive back the trust property at its depreciated value and will only be out the legal fees that were paid to set up the GRAT.

What is the purpose of a GRAT Trust?

A GRAT is a trust created so that individuals and families can move wealth to heirs while using little, if any, of their lifetime federal gift and estate tax exclusion. An individual would work with an attorney to set up an irrevocable trust and transfer assets into it.

What happens at the end of the term of a GRAT?

Thus at the end of the term, the value remaining in the GRAT may still be large, even though the initial IRS calculation suggests that it should have been zero. This remaining value is then passed on to the beneficiary without incurring a gift tax.