CFP

Liquidity, Powers of Appointment, and Trusts - Grantor Retained Annuity Trusts

Grantor Retained Annuity Trusts
A grantor retained annuity trust (GRAT) is an irrevocable trust for which the grantor retains the right to receive a fixed annual dollar amount or percentage of the initial assets deposited at least annually from the trust. The grantor usually transfers appreciating or income producing property to the trust in exchange for this "fixed annuity" type payout feature for a set number of years.

Characteristics of a GRAT:
- After the initial transfer of the property (gift) into the trust, no other additions are permitted.
- An excellent way to remove property from an estate utilizing the gift tax exclusion amounts.
- Provides a steady reliable income steam for the grantor for a set number of years.
- When the term of the GRAT ends, the remaining assets are transferred tax-free to the named beneficiaries.
- If the grantor does not out live the term of the trust, all of the property is brought back into the grantor's estate.

Example:
Nancy transfers $1 million into a GRAT with a $50,000 payout to her annually for the next 15 years. If Nancy dies five years later, then the full date of death value of the trust will still be considered part of Nancy's gross estate.




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