Succession Planning


A Grantor Retained Annuity Trust (GRAT) or Grantor Retained Unitrust (GRUT) allows you to establish a trust and transfer appreciating assets to family members while retaining an income and use of the property or asset for a fixed period of years. At the end of the payment period or at your death, the assets in the trust pass to the other trust beneficiaries (your family members or successors). The value of the income you received will be subtracted from the assets transferred to the trust at that time (for example, a share of the business). This can help reduce the value of your business to lower estate and gift taxes.

Remember, a transfer of property to an irrevocable trust is subject to gift tax. However, with a GRAT, you (the grantor) retain an interest, so the value of the transfer is discounted. Gift tax will only be imposed on the remainder interest, and may be sheltered under the gift tax exemption.

What are the potential tax advantages of a GRAT or GRUT?

  • The value of the transfer may be discounted for federal gift tax purposes
  • The principal remaining in the trust at the end of the term of years is removed from your estate
  • Interest remaining in the GRAT or GRUT (appreciation and/or earnings) at the end of the term of years passes to the beneficiaries and is exempt from gift tax

Note: Investment strategy is a key component of a GRAT working well. If the GRAT underperforms according to rates set by the IRS (called the section 7520 rate), no tax savings will be achieved, and no property will be transferred to your beneficiaries.

Note: If you do not outlive the term of years, any property remaining in the GRAT will be included in your estate and will be taxed.

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