Having an income-producing asset can be a significant source of revenue but, depending on how it is owned, can also be subject to estate taxation. One way to minimize tax and continue to receive benefits from this kind of resource is to place it in a Grantor Retained Annuity Trust (GRAT). Here are some facts to consider when deciding to if you should create an annuity trust.
A GRAT is an irrevocable trust which means that in most circumstances, once it is created and funded, the trust assets will remain in the trust body. When the GRAT trust creator puts an income-producing asset into the trust, they will no longer own the asset but will receive a stipend or compensation from the trust.
How does a GRAT Work?
Basically, a GRAT allows the individual who creates the trust to retain their interest in the trust assets through their regular payments. However, to be a qualified interest, the GRAT annuity payment must be a fixed percentage of the initial fair market value of the property or in a fixed dollar amount. The interval and amount will vary according to the trust terms. However, the annuity must also be paid at least one time per year. Once the GRAT is set up and funded, there cannot be any additional funding.
How Long Can a GRAT Last?
A GRAT can be created to last anywhere from as little as two years to the length of the trust creator’s life. The length of the trust term depends on the creator’s circumstances. When the trust ends, the assets go to any named beneficiaries.
Is a GRAT Right for Me?
A primary benefit of a GRAT is that once the trust is done, in most cases, the assets can be given to the beneficiaries without out being subject to gift or estate taxes. Possible tax liability depends on when the GRAT was created. The calculation involves subtracting the fixed annuity value from the asset’s actual value. Whatever is left, could be subject to gift tax in the year the GRAT was created.
Is there a downside of having a GRAT?
The primary risk in placing assets into a GRAT is that the trust creator may die before the trust term is completed. Were this to happen, the trust assets would be considered part of the creator’s estate and therefore subject to estate tax.
A GRAT can be an excellent way to continue benefitting from an asset while protecting it from taxation. However, these are complex legal devices which need to be prepared by someone with an ample understanding of the rules, laws, and requirements. Our office has experience assisting clients in determining if a GRAT is a favorable option for their circumstances. Contact us online or by phone if we may be of assistance. https://www.michiganestateplans.com/contact/