One of the biggest issues in estate planning is how much the beneficiaries will actually receive once probate is finally completed. For high-net estates, this can be a serious concern, leading to trusts and other instruments that take assets out of an estate for the purpose of probate.
If you’re currently considering updating your estate plan, one option to consider is the “Grantor Retained Annuity Trust or GRAT.
How It Works
The grantor, or trust maker, transfers assets into this trust and receives an annuity payment every year for a set number of years. At the end of that time period, the remains of the trust are disbursed to the beneficiaries. This is usually the grantor’s children but can be whoever he or she chooses.
The payment amount is calculated with the IRS’s Section 7250 Interest Rates. The grantor sets the annuity payment so that it equals the 7250 rates exactly. The intent is that all of the assets added into the trust will be returned to the grantor in the annuity payments, theoretically leaving nothing to the beneficiaries. This is known as a “zeroed-out GRAT,” since the assets are drained before the end of the term.
The plan is that any assets added to the GRAT appreciate beyond the 7250 rates, and the appreciated value is passed onto the beneficiaries.
Who Uses GRATS?
Both wealthy individuals and those involved in startups are especially interested in these types of trusts. Adding stocks into a GRAT can be lucrative since the appreciation for stock prices of IPO shares frequently overtake the IRS’s presumed rate of return.
For this reason, a GRAT can lower a grantor’s tax burden as well as pass along more money to their children and beneficiaries without eradicating their lifetime exemption from gift and estate taxes.
There are a couple of reasons why the GRAT isn’t a completely foolproof method of transferring assets.
First, if the value of assets added doesn’t appreciate above the 7250 rates, the grantor will receive the depreciated value of the assets after paying legal fees to set up the trust. The trustee must take money from the principal to make the annuity payments.
Assets must appreciate faster than the 7250 rates over the course of the GRAT. If the assets do not outperform the 7250 rates, the assets are returned to the grantor minus the legal fees for setup and become part of the estate.
The trust does not qualify for an annual tax exclusion, since it’s a gift on future interest. Appreciation over and above the amount transfers to the grantor’s children or beneficiaries without gift tax consequences.
The grantor should outlive the term of the GRAT, which is usually ten years. Should the grantor die before the end of the GRAT, everything transferred into the GRAT is then transferred back into the grantor’s estate. This means that the assets would be taxable, and the grantor would still lose on the legal fees it cost to set up the trust.
If the grantor needs the gifted assets to pay for living expenses or long-term care, he or she will not have access to them. Should the assets depreciate, there will be even less.
If a GRAT sounds like something that your estate plan could benefit from, speak with an Illinois estate planning attorney soon.
Chicago’s Attorney For GRATS And Other Trusts
Estate planning can mean a number of different trusts, depending on the current state of your finances. Adding a GRAT is just one way to help you to pass your assets along to your beneficiaries as you see fit.
James C. Provenza is an Illinois estate planning attorney with more than 25 years of estate planning experience. Call our firm today at (847) 729-3939, or use our online contact form.