A grantor retained annuity trust (GRAT) can help families remove their businesses from the taxable estate. This type of trust is established by a grantor, who transfers assets to the GRAT for a specified term. Normally, the GRAT document is written to provide that the grantor (often a parent) retains the right to receive 100% of the initial fair market value of the transferred assets by way of annual fixed payments. With these payments, the grantor receives a rate of return based on an IRS-prescribed interest rate—the “7520 rate.” The benefit of a GRAT is that if at the end of the trust’s specified term assets remain in the trust, then the named beneficiaries inherit the asset without additional gift tax consequences. On the other hand, the major problem with a GRAT is that if the grantor dies within the specified term, the assets remaining in the trust revert back to the grantor’s taxable estate, not evading any gift taxes.
See Craig W. Smalley, The Beauty of Grantor Retained Annuity Trusts, Accounting Web, November 18, 2016.
Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.
