A Grantor Retained Annuity Trust, or GRAT for brief, is an unique type of irrevocable trust that permits the Trustmaker/Grantor to gamble versus the odds and, if the Trustmaker/Grantor plays their cards right, then a considerable amount of wealth can be moved down to the next generation for essentially no estate or gift tax dollars. For more information speak to us about estate planning and other ways to protect you assets and avoid probate.
How Does a GRAT Work?
Here is a basic introduction of how a GRAT works:
The Grantor/Trustmaker transfers specific possessions into the name of the GRAT and, as the name recommends, retains the right to receive a yearly annuity payment for a particular variety of years. When the term of the GRAT ends, exactly what is left in the GRAT is dispersed to the trust beneficiaries (kids or other beneficiaries of the Grantor’s/ Trustmaker’s option).
The amount of the annuity payment that is needed to be paid to the Grantor/Trustmaker throughout the term of the GRAT is calculated using an interest rate that is identified regular monthly by the IRS called the section 7520 rate. The section 7520 rate for December 2013 is 2.0% and will increase to 2.2% for January 2014, which is still extremely low indeed.
The Grantor/Trustmaker can set the annuity payment so that it will be precisely equal to the area 7520 interest rate, suggesting that in theory all of the properties that have been moved into the GRAT will be returned to the Grantor/Trustmaker in the form of the annuity payments and nothing will be left for circulation to the kids or other recipients when the GRAT ends.
While generally the transfer of possessions owned by somebody into an irrevocable trust for the benefit of someone else would be deemed a gift for federal present tax functions, with a GRAT given that in theory all of the properties transferred in might return to the Grantor/Trustmaker, the worth of the present to the recipients of the GRAT will be at or close to $0. This is called a “zeroed-out GRAT.”
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