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Grantor Retained Annuity Trust

What is a Grantor Retained Annuity Trust?

 A grantor retained annuity trust is a specific type of trust that is designed to minimize the taxes assessed when you make an intergenerational transfer of assets.  When you create a grantor retained annuity trust, you create an irrevocable trust that lasts for a designated time period. When you establish and transfer assets into the irrevocable trust, you pay gift tax at the time that the trust is established.

You must fund the tax with assets, which at the end of the term of the trust will be transferred to your designated beneficiary of gift tax. The assets that you use to fund the trust will earn income, and you will receive a fixed annuity payment based on the anticipated income from those assets. The value of the annuity is calculated based on a percentage of the total value of all of the assets that are held within the grantor paid annuity trust.

The annuity must be paid out for the designated term of the trust. If the trust creator passes away prior to the expiration of the trust term, the assets held within the grantor retained annuity trust become part of the trust creator’s taxable estate and the tax- gift to the designated beneficiary fails.

A grantor retained annuity trust, or GRAT, is an estate planning technique aimed at minimizing tax liability. A GRAT can provide yearly annuity payments and can facilitate the tax- intergenerational transfer of estate assets.

Clarity Legal Group® can provide you with help in understanding how a grantor-retained annuity trust can be used to protect assets from estate taxes and can work with you to create this type of trust if it is the right option for you and your family.

We have helped many clients to make effective use of a GRAT and of other estate planning tools that give them the power to protect the wealth they have worked so hard to acquire from losses due to substantial taxation.  We can help you decide if a GRAT is the right tool for you.

 Should You Create a Grantor Retained Annuity Trust?

 Creating a grantor paid annuity trust can have significant tax benefits for the intergenerational transfer of wealth. Many creators of grantor retained annuity trusts also appreciate having a reliable annuity payment from the income on the trust assets.

However, because a grantor retained annuity trust is irrevocable, it does not provide the flexibility to change and modify the trust as needed. There is also the potential risk that the creator of the trust will pass away before the end of the term, thus losing the specific tax benefits associated with the tax- transfer of wealth to the next generation.

 A grantor retained annuity trust is not the only option for those who wish to minimize or avoid taxes on wealth transfers, and there are alternatives that could provide more flexibility under certain circumstances. However, a grantor retained annuity trust, when used properly, can provide significant financial advantages and it is definitely an estate planning tool that is worth considering as you determine how best to provide for your loved ones and protect all that you have worked so hard to acquire.

How can Clarity Legal Group® Help with a Grantor Retained Annuity Trust?

 Clarity Legal Group® can provide you with invaluable assistance in determining the best estate planning tools to use in every financial situation. Our legal team will work closely with you to identify your goals for your family and finances and will provide you with advice on grantor retained annuity trusts and other estate planning tools.

 We will help you to determine what types of trusts and other estate planning arrangements to create and will guide you step-by-step through the process of creating legally enforceable trusts and other tools that provide you and your loved ones with the tools you need to meet your specific goals.

What Is a Grantor Retained Annuity Trust?

What Is a Grantor Retained Annuity Trust?There are various different strategies that can be implemented to mitigate your tax burden if your estate is exposed to taxation.

A grantor retained annuity trust can be part of your wealth preservation plan. Before we examine these trusts in detail, we should share some information about the federal estate tax so that you can determine your level of exposure.

Estate Tax Exclusion

There is a line drawn in the sand that separates those who must pay the estate tax from those who are exempt in the form of the federal estate tax credit or exclusion. If your assets exceed the amount of this exclusion, the estate tax is a factor for you.

For the rest of 2014 the exact amount of the federal estate tax exclusion is $5.34 million. There are annual adjustments to account for inflation, so the 2015 exclusion may be somewhat higher than the $5.34 million that we have this year.

The federal estate tax carries a significant rate. At the present time, the top rate of the death tax is 40 percent.

Federal Gift Tax

It would be logical to consider giving gifts while you are living in an effort to avoid the estate tax. However, this is not possible because there is a federal gift tax. The gift tax and the estate tax are unified, so the $5.34 million exclusion encompasses large gifts that you give while you are living along with the estate that you are passing on to your heirs.

Zeroed Out Grantor Retained Annuity Trust

Now that we have provided the necessary background information, we can look at grantor retained annuity trusts.

When you create the trust you name a beneficiary who would inherit any remainder that is left in the trust after its term expires. Because the beneficiary may be assuming ownership of a remainder, the act of funding the trust is looked upon as an act of taxable gift giving.

The IRS accounts for anticipated interest by adding 120 percent of the federal midterm rate. This is sometimes referred to as the hurdle rate.

To implement this strategy you endeavor to zero out the grantor retained annuity trust. To do this, you take annuity payments over the term of the trust that are equal to its entire taxable value.

When you fund the trust you should utilize highly appreciable assets. If the assets that have been conveyed into the trust outperform the hurdle rate, there will be a remainder when the trust term expires. The beneficiary would assume ownership of this remainder of any further gift tax consequences.

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If you would like to learn more about grantor retained annuity trusts and other tax efficiency tools, contact us through this website to request a consultation.