Ashley Flotte’s Legal Blog

GRATs are increasingly popular among those wishing to implement lifetime gifting strategies. GRATS, or Grantor Retained Annuity Trusts, are vehicles designed to minimize gift tax liability in the transfer of estate assets to future generations. To initiate a GRAT, a trust is created that will remain in existence for a certain period of time, with a fixed annuity payment being paid out each year to the grantor (i.e., trust creator). At the end of the trust term, the remainder of the trust assets are passed along to the beneficiaries tax-free as a gift. A caveat, though, is that if the grantor dies within the trust term, the assets of the trust must be included in the grantor’s estate for estate tax purposes.

At the time the trust is created, the IRS imposes gift tax on the amount of assets that will eventually be gifted to the grantor’s heirs. The amount of the gift is the difference between the amount initially funding the trust and the present value of the annuity payments received by the trust grantor. Thus the ideology behind a GRAT is that the greater the value that is placed on the grantor’s retained interest (the annuity interest), the less the value of the gifted remainder interest will be—and therefore the less the gifted value will be for gift tax purposes.

While the mechanics might seem complex, the GRAT is a very useful structure in the gift planning arena. A GRAT can save significant wealth transfer taxes when executed properly. If you are seeking more information on lifetime gifting strategies, contact your financial professional and your qualified estate planning attorney for more tips on the use of GRATs and other gift tax-saving devices.