Estate planning is an essential part of preparing to provide for your beneficiaries. There are various ways to pass along your assets to family members after your death. While there are several estate planning tools available, you will want to make the best choice to address the taxes your loved ones will need to pay. Trusts are often utilized to transfer assets to beneficiaries. One type of trust that you may want to explore is the grantor-retained annuity trust. A knowledgeable estate attorney will help you set up a trust as part of your estate plan.
What is a Grantor-Retained Annuity Trust?
A grantor-retained annuity trust is a type of irrevocable trust that may be useful as part of your estate plan. Grantor-retained annuity trusts (GRATs) are designed to hold assets for a specific period of time. The grantor receives annuities for the duration of the trust. GRATs are used to transfer assets to beneficiaries while limiting gift tax liability. The irrevocable trust is not easily changed. The grantor, the person who creates the trust, transfers ownership of particular assets into the trust. The trust pays a fixed annuity amount, set when the trust is funded based on IRS interest rate assumptions, rather than the assets’ actual investment return. The GRAT is a way to limit the growth of taxable estate assets.
Benefits of Utilizing a GRAT
The benefits of using a GRAT are the tax savings it can provide to beneficiaries. Estate and/or gift taxes can apply to assets transferred to heirs, whether during life or at death. The utilization of a GRAT allows a grantor to place assets away from their estate and allows for a tax exemption. Currently, the IRS exclusion is $15 million per individual ($30 million for a married couple). GRATs are especially useful for transferring assets expected to appreciate significantly, such as a closely held business before an IPO, regardless of whether the estate exceeds the exclusion amount.
Potential Drawbacks Associated with a GRAT
The GRAT is in place for a specific period of time. If the grantor passes away before the trust expires, the assets become part of the estate. The assets would then be distributed as per the will, and the beneficiaries would be subject to federal estate tax on their inheritances if the estate exceeds the exclusion amount. However, it may be possible to pass the annuity payments to a surviving spouse. Also, once a grantor adds assets to a GRAT, they are no longer under the grantor’s immediate control and cannot be easily removed. A GRAT’s benefit depends more on the asset’s growth potential than on total estate size, so it’s worth discussing with an attorney even if your estate is under the federal exclusion.
Legal Guidance
The GRAT is a specific type of estate-planning tool that is useful in many situations. However, it may be somewhat complex. You will want to meet with your estate-planning attorney to review the details that are unique to your financial situation. A GRAT may be helpful based on your particular needs. To learn more, contact Moen Sheehan Meyer, Ltd. at (608) 784-8310 or online to schedule a consultation with our experienced legal team.