A GRAT can be a smart estate planning tool if used correctly.
You are interested in a Grantor Retained Annuity Trust (GRAT).
Maybe you want to use it to hold your stock or business interests for a specific amount of time.
According to a recent AccountingWeb’s recent article titled “The Beauty of Grantor Retained Annuity Trusts,” a GRAT could be set up for a mere two-year limit.
Here are the basics of a GRAT in a nutshell.
GRATS can be written so you receive 100 percent of the initial fair-market value of the transferred asset back as an annuity.
The IRS interest rate is called the “7250 rate".
Section 7520 of the Internal Revenue Code outlines how the payout "rate" back to you should be calculated (1.6 percent in November of this year).
The grantor (read "you") will receive this rate of return on the GRAT assets.
After the term of the “zeroed-out GRAT” is completed, remaining assets pass to the beneficiaries exempt from additional gift tax.
A little confused?
How about an example from the original article?
You, the grantor, place your $500,000 family business stock in a GRAT for say ten years.
The rate is 1.6 percent.
As a result, the GRAT pays you $50,000 ... plus the 1.6 percent interest.
After the ten years, the appreciated value of the stock would pass to the beneficiaries.
A few things to note.
S corporation stock requires you to file the S-election under the QSub rules.
Also, if you—the grantor—die, the GRAT assets remain a part of your taxable estate.
So you better hope to outlive the term of your GRAT!
After all, nothing like a little incentive to exercise more, sleep better and eat right.
Is a GRAT appropriate for you?
Working with an experienced estate planning attorney will help you make the wisest decision for your unique situation.
Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.
For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.
Reference: AccountingWeb (November 18, 2016) “The Beauty of Grantor Retained Annuity Trusts”