A Grantor Retained Annuity Trust (GRAT) is an irrevocable trust used in estate planning to reduce inheritance or gift taxes. The grantor receives a regular income for a set period, after which the remaining assets are transferred to a beneficiary.
A Grantor Retained Annuity Trust (GRAT) is an estate planning tool used to reduce the impact of inheritance or gift taxes. This type of trust is designed to provide a regular income to the grantor for a specified period of time. After the time elapses, the remaining assets in the trust are transferred to a beneficiary.
Each retained annuity trust grantor must have a grantor, trustee, and beneficiary. The grantor is the individual who establishes the trust. This individual transfers a certain amount of assets to a trust. The assets are cared for by an administrator. Once the conditions of the trust have been met, the assets are transferred to the beneficiary of the trust.
In a grantor-retained annuity trust, the beneficiary must be a family member of the person who established the trust. The GRAT is a type of irrevocable trust agreement. It is irrevocable, so assets transferred to it are permanently removed from the grantor’s estate. The grantor is removing assets from the grantor’s estate, so no estate or gift taxes will be due on these assets when they are transferred to the beneficiary.
When the grantor retained annuity trust is started, a certain amount of money will be transferred to an account in the name of the trust. A specific term of years will be established to govern the life of the trust. An annuity payment will also be established. This amount of money will go to the grantor each year for the life of the trust. Once the annuity payments have been made for the specified number of years, the remainder of the trust will be transferred to the beneficiary.
Many people prefer this estate planning tool because it allows them to create a regular income and provide a tax-free gift for their beneficiaries at the same time. If the grantor had a substantial estate, his beneficiaries might have to pay estate taxes on the inheritance if he did not use a grantor-retained annuity trust. If the grantor dies before all annuity payments can be made, the account balance will automatically transfer to the trust beneficiary. To start this type of trust, an estate planning attorney should be consulted.
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