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Grantor Retained Annuity Trust

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A Grantor Retained Annuity Trust (GRAT) is another estate planning tool that you may want to take advantage of. At first GRATs may sound a little more complicated than other trusts or estate planning options, but when explained step by step they can be much more easily understood. As always, you should work with a skilled estate planning attorney to find out whether a GRAT is right for your estate.

Concepts

In order to comprehend a GRAT, there are some concepts that first need to be understood:

  • Annuity – An annuity is a type of financial product where someone makes an initial upfront investment and then at some point in the future receives periodic payments from the investment. During the time between investment and payouts, the amount of the account will hopefully be growing due to wise investment by a financial advisor. Payouts can be certain fixed amounts or the payout can be based on how well the fund is doing. You also can decide whether you want payment for the rest of your life or for a specific period of time.
  • Trust– A trust is a financial tool where someone puts assets for the benefit of another under the care of a trustee for a specific period of time.
  • Grantor– A grantor is the person who provides the money or assets for the trust.

GRAT

The purpose of a GRAT is to pass assets to a younger generation with the least amount of tax liability. A GRAT is a mixture of the concepts above. A GRAT is a way for a grantor to plan to pass money down to a beneficiary while at the same time retaining some benefits for themselves.

A GRAT is where the grantor, the person who is planning his or her estate, puts money into an irrevocable trust. An irrevocable trust means that someone else (other than the grantor) is a trustee and it cannot be undone. In the case of a GRAT, it is an annuity trust meaning that the grantor still retains an interest. This means that the grantor and the beneficiary both have an interest in the trust. The trust can expire at a specific time or at the death of the grantor, and then the assets will pass to the beneficiary.

Benefits of a GRAT

GRATs can be helpful for people who are trying to avoid paying gift tax because the value of the gift is determined at the time the trust is created and the present value is offset by the value retained by the grantor. In a nutshell, if you are likely to pay estate or gift tax, and the income that is created by the annuity grows at a higher rate that the IRS’ tables, then you will end up owing less tax than you would otherwise with a GRAT.

Contact The Villages Estate Planning Attorneys Today

If you have questions about GRATs or any other estate planning tool, you should contact a knowledgeable estate planning attorney to get your questions answered. GRATs are usually just one part of a larger estate plan and our experienced estate planning attorneys at Millhorn Elder Law Planning Group in The Villages can help you to create an estate plan that works best for you and your family.

Resource:

money.cnn.com/retirement/guide/annuities_basics.moneymag/

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