Grantor Retained Trusts & Unitrusts

A critical component of estate planning is wealth management, especially for individuals who want to protect their assets and minimize taxes. Two wealth management tools used in estate planning are grantor-retained annuity trusts (GRATs) and grantor retained unitrusts (GRUTs).

These trusts allow individuals to transfer assets to beneficiaries while retaining certain income rights for a specified period. In this article, we will look at GRATs and GRUTs, highlighting their benefits and differences.

What is a GRAT?

A grantor retained annuity trust (GRAT) is an irrevocable trust in which the grantor transfers assets while retaining the right to receive a fixed annuity payment for a predetermined period. At the end of the trust term, the remaining assets pass to the beneficiaries, typically family members or trusts, for their benefit.

Benefits of GRATs

One of the key benefits of GRATs is their ability to minimize gift and estate taxes. For tax purposes, assets are considered gifts when they are transferred into the trust. However, the taxable gift value is reduced by the value of the retained annuity interest. This allows the grantor to transfer assets to beneficiaries at a reduced tax cost.

Additionally, GRATs can be used to transfer the future appreciation of assets to beneficiaries. If the growth rate of the assets exceeds the IRS’s assumed interest rate (known as the Section 7520 rate), the excess appreciation passes to the beneficiaries free of gift and estate taxes. This makes GRATs an attractive option for individuals who expect their assets to appreciate significantly in the future.

What is a GRUT?

Grantor retained unitrusts (GRUTs) are similar to GRATs in that they are irrevocable trusts that provide income rights to the grantor for a specified period. However, instead of receiving a fixed annuity payment, the grantor receives a percentage of the trust’s value, which is revalued annually based on the trust’s performance.

Benefits of GRUTs

GRUTs offer more flexibility compared to GRATs since the grantor’s income is based on a fixed percentage of the trust’s value, which means it can fluctuate over time. If the trust’s assets grow, the grantor’s income increases, providing a potential hedge against inflation. However, if the trust’s assets perform poorly, the grantor’s income may decrease, which is a risk to consider.

Another advantage of a GRUT is the ability to fund the trust with assets that are expected to generate future income. For example, a grantor can transfer shares of a closely held business or income-producing real estate into the trust. This allows the grantor to remove these assets from their estate while still receiving income.

Choosing Between a GRAT and a GRUT

Deciding which type of trust is best for you depends on various factors, including your income needs, the expected performance of the assets, and the desire for flexibility. A GRAT would be suitable if you want a fixed income stream and prefer a higher level of certainty in the outcome. On the other hand, a GRUT might be better if you want income tied to the trust’s performance and desire the potential for increased income over time.

Something to keep in mind when considering creating a GRAT or a GRUT is that they are irrevocable trusts, which means once assets are put into the trusts, the grantor can’t take them back out. Another consideration is that if the interest rate is lower than the rate set by the IRS or the grantor dies before the trust ends, then the trust is closed, and the assets will be added to the grantor’s estate instead of passing directly to the beneficiaries.

Consult a Professional

Both strategies have their merits, but it’s important to consult with estate planning professionals to determine the best approach based on individual circumstances. Additionally, changes in tax laws and regulations can affect the effectiveness of GRATs and GRUTs, making it essential to stay current on relevant legislation.

If you have questions or would like to discuss your personal legal matters, with a Florida Estate Planning Attorney please don’t hesitate to contact us at (321) 729-0087.