GRATS: Great Estate Planning Tools!
GRAT (grantor-retained annuity trust) is an irrevocable
trust into which you can place cash, stocks, mutual
funds, real estate, or other income-producing property.
You are called the grantor (creator) of the trust. As
its name implies, in a GRAT, you, the grantor, retain
the right to an annuity for a fixed period of years
from assets you've placed into a trust.
At the end of the period of time you specify when you
set up the trust (which can be practically any amount
of time from, say, 2 to 20 years), the asset you've
placed into the GRAT will pass to the beneficiary you
named - typically a child, grandchild, or other family
member or friend.
WHO SHOULD CONSIDER A GRAT: You should consider
a GRAT if you have the appropriate type of asset, are
highly likely to outlive the specified term of the trust,
have an estate over $2,000,000 (and it's growing)
are financially able and psychologically willing to
part currently with principal and eventually with
the cash flow it produces,
are willing to make lifetime gifts to relatives and/or
are willing to use some or all of your unified credit
to offset any outright gift tax in order to achieve
significant estate tax savings,
can act while the federal discount rate (planners
call this the Section 7520 rate) is relatively low
(which it is currently) and before the assets you
own reach their appreciation potential (and since
many assets are currently undervalued in today's market,
this is an excellent time for many to consider a GRAT.)
are a surviving spouse or divorced individual looking
for a marital deduction substitute.
KEY POTENTIAL ADVANTAGES: Saving estate and gift taxes
are the two major objectives. In a nutshell, the GRAT
allows you to transfer large amounts of wealth at a
significant gift tax discount. If you survive the term
of the GRAT - even by only one day - the value of the
property in the trust at that time is removed from your
estate and your family may save thousands - even millions
- of dollars of federal and state death taxes.
ADDITIONAL POTENTIAL BENEFITS: There are also many non-tax
benefits to GRATs. A GRAT can help you ensure succession.
For example, if you want specific assets, such as stock
in a closely held corporation, other business interest,
land, or family compound to go to one child rather than
another, or you do not want a former spouse, creditor,
or someone who contests your will to be able to obtain
that asset, the GRAT will help provide assurance against
such a contingency. In most states, because a GRAT is
an irrevocable trust, it's much less likely that the
property will be lost if your estate is embroiled in
a will contest, election against the will, or a creditor-imposed
GRATs can help you unify assets. If you own income-producing
property in more than one state and would like to unify
the administration of those assets and save on probate
costs, the GRAT can help avoid ancillary administration
(probate of out-of-state property) and its consequent
costs, delays, and aggravations.
GRATs are age neutral. There is practically no cut-off
age after which a GRAT will no longer be mathematically
feasible. These are "little to lose, lots to gain" tools
that even people in their 80's may want to use.
ARE GRATs THE PERFECT ESTATE PLANNING TOOL? Of
course not. Every state or financial planning tool or
technique has costs and downsides and no concept works
equally well for everyone. The trick is to find the
combination of tools or techniques that will most cost-efficiently
help you achieve your own personal objectives.
Please feel free to call or email to further discuss
GRATs or other matters of financial concern.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
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