Using GRATs to Benefit Parents or Grandparents

GRATs can be used to benefit parents or grandparents the same way that they can be used to benefit children. A child sets up a trust with a term of at least two years, funding it with stock or other investments. The trust pays principal and interest at a rate set by the IRS to the child during its term. Anything above this amount passes to the child’s parents at the end of the term without being counted as a gift for tax purposes.

If you want to take advantage of this technique, now is the time to do it. The Obama administration has proposed a ten-year minimum term for GRATs, meaning that parents would have to wait ten years before receiving their portion of the assets. If you don’t want to set up a GRAT for the benefit of your parents, you can still give money to them outright. A married couple may give one set of parents up to $52,000 a year without owing gift taxes. Another option that avoids gift taxes is to pay your parents’ medical service providers directly for the care they receive.

See Elizabeth Ody, GRATs Let Children Pass Millions to Mom or Granny Free of U.S. Gift Taxes, Bloomberg, Mar. 8, 2011.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this to my attention.