Planning For A Secure Future

Understanding a grantor retained annuity trust

On Behalf of | Feb 25, 2022 | Estate Planning, Trusts

When it comes to estate planning in California, there are many different options to choose from. One option that you may have heard of is a grantor retained annuity trust, or GRAT for short. Keep reading to learn more about a GRAT and how you can use it in estate planning.

What is a GRAT?

Grantor retained annuity trusts are financial tools for estate planning that allow you to give assets to your heirs while retaining the right to receive payments or annuities from the growth of those assets for a set period of time. Besides earning substantially from your assets, you can also use this tool to avoid or minimize estate or gift taxes, ensuring that your heirs get a greater share of their inheritance.

How does a GRAT work?

When you create a GRAT, you transfer assets such as stocks or bonds into the trust. These assets will then be used to generate annuity payments over a set period of time, usually 2-10 years. At the end of the payment period, the assets in the trust will go to your designated beneficiaries without tax implications.

To ensure that it works for you, structure your GRAT so that its actuarial value at the end of the set period is $0. For instance, if you put $1 million worth of stock in GRAT for two years, and the annuities you set to receive are $505,000 each year, with the Section 7520 Interest rate of 1%, then the IRS will calculate that you, the grantor, received $1,010,000 from the trust, leaving $0 in actuarial value to your heirs. But if your assets actually grew at the rate of 6% instead of 1%, the remaining value of the GRAT will be $120,000. The $120 000, plus the frozen amount of $1 million, will go to your heirs without the federal estate and gift tax implication.

Anyone in California can use a GRAT to secure and pass on assets. However, ensure that the assets you put in it have the potential to grow with time.