Grantor Retained Annuity Trust
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The Grantor Retained Annuity Trust or GRAT, lets you remove assets from your estate without giving up the income they generate. GRATs can be effectively used for the transfer of closely-held business interests. Using this trust, you can potentially remove an asset from your estate with reduced gift tax consequences, as well as enjoy annuity income from the asset transferred to the trust for a predetermined period of time. Family-member GRAT beneficiaries ultimately receive the gifted assets -- whether stock, investments, or real estate -- at the end of the trust term.
Since they are annuities, GRATs pay you a fixed dollar amount each year. For instance, the trust could pay you $4,000 annually. Be cautious, however. If you take more income from the trust than you can use during your lifetime, you will wind up putting that unspent money back into your taxable estate and possibly paying estate taxes on it. Your gift tax is based on the present value of the remainder interest going to your heirs. Therefore, you will be transferring the assets at a discounted rate. That means a lower gift tax bill for you. Since GRATs are irrevocable, you can't take the assets back later if you decide you need them. So be sure you can afford to lose control of those assets before placing them in the trust.
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