What are GRUTs?

GRUTs, or Grantor Retained Unitrusts, are lifetime gift planning vehicles designed to minimize gift tax liability in the transfer of estate assets to future generations.

Both Grantor Retained Annuity Trusts (“GRATs”) 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, it will save the transfer taxes that would otherwise be incurred upon the appreciation had the individual held on to the property until his or her death. Therefore, the use of GRATs and GRUTs has become popular for transferring assets to subsequent generations.

It is important, however, to understand the difference between the two vehicles. When utilizing a GRAT, the grantor will transfer assets to an irrevocable trust in return for the right to receive fixed payments at least annually based upon the initial fair market value of property. Although the property transferred to the trust may increase in value during the trust term, the fixed amount will not change. When utilizing a GRUT, however, the grantor will receive a fixed percentage of the fair market value of the property in the trust—an amount that will be revalued annually. Therefore, as the trust property increases or decreases in value, the amount returned to the grantor each year will fluctuate. The valuation of the gift will be determined based on the remainder value of the property transferred into trust.

A GRUT is very similar to a GRAT, except instead of an annual payment which is set upon creation of the trust, the payment is specified as a fixed percentage of the value of the trust assets as determined each year. Due to this difference, the GRUT does not have the same potential for discounted giving. Prior to implementing either type of trust for your gift tax planning needs, is very important to discuss the benefits and drawbacks of GRATs and GRUTs with your estate planning attorney and trusted financial professional.

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; please give us a call today.

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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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