What are GRATs?

When discussing your lifetime gifting options with your estate planning attorney or financial professional, the topic of “GRATs” might be approached. GRATs seem to be increasingly popular among those wishing to implement lifetime gifting strategies. GRATS, or Grantor Retained Annuity Trusts, are vehicles designed to minimize gift tax liability in the transfer of estate assets to future generations.

Both Grantor Retained Annuity Trusts and Grantor Retained Unitrusts (“GRUTs”) are irrevocable trusts designed to remove assets from a person’s estate while incurring as little wealth transfer tax liability as possible. In a general sense, when an individual makes lifetime gifts of appreciating property to such a trust, he or she will save the transfer taxes that would otherwise have been incurred upon the appreciation had he or she held on to the property until death. Therefore, GRATs and GRUTs have become popular vehicles for transferring assets that are anticipated to appreciate at a rate that exceeds the payments to be made to the trust creator.

To initiate a GRAT, a trust is created that will remain in existence for a certain period of time, with a fixed annuity payment being paid out each year to the grantor (i.e., trust creator). At the end of the trust term, the remainder of the trust assets are passed along to the beneficiaries tax-free as a gift. A caveat, though, is that if the grantor dies within the trust term, the assets of the trust must be included in the grantor’s estate for estate tax purposes.

At the time the trust is created, the IRS imposes gift tax on the amount of assets that will eventually be gifted to the grantor’s heirs. The amount of the gift is the difference between the amount initially funding the trust and the present value of the annuity payments received by the trust grantor. Thus the ideology behind a GRAT is that the greater the value that is placed on the grantor’s retained interest (the annuity interest), the less the value of the gifted remainder interest will be—and therefore the less the gifted value will be for gift tax purposes.

While the mechanics might seem complex, the GRAT is a very useful structure in the gift planning arena. A GRAT can save significant wealth transfer taxes when executed properly. If you are seeking more information on lifetime gifting strategies, contact your financial professional and your qualified estate planning attorney for more tips on the use of GRATs and other gift tax-saving devices. The Houston Estate Planning attorneys at Garg & Associates are available to guide you with regard to all of your lifetime gifting and estate planning needs; give us a call today.

We invite you to contact us for a consultation. Call Garg & Associates, PC at 281-362-2865 or complete our contact form.

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Garg & Associates, PC | 21 Waterway Avenue, Suite 300 | The Woodlands, Texas 77380 Please call 281-362-2865 | Fax: 866-743-4506
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