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The Wealth & Wisdom Blog

Information on Estate Planning, Estate and Trust Administration and Unique Asset Planning

A “Grantor Retained Annuity Trust” (“GRAT”) is a planning strategy used to transfer wealth without necessarily using any federal gift tax exemption.  Under this strategy, a donor irrevocably transfers assets to an irrevocable trust, but purposely retains a fixed annuity amount for a fixed period of years (called the “annuity period.”) While the donor will benefit from the fixed annuity amounts received back from the GRAT during the annuity period, the donor irrevocably gives up the right to benefit from the remaining assets (if any) that are remaining in the GRAT after the payments made to himself or herself following the end of the annuity period.

The primary tax benefit of a GRAT is that only portion of the transfer to the GRAT is considered a “gift.”  The portion of the transfer that is considered the gift is the amount that the IRS would “predict” to be remaining in the GRAT at the end of the annuity period.  If the fixed annuity payments made back to the donor are structured to match the assumed rate of return set by the IRS, the “predicted” value of the remainder gift would be zero.  That is, the IRS would predict that nothing would be left for transfer to the remainder beneficiaries at the end of the annuity period, and the “taxable” portion of the gift would be zero.  When interest rates are low, the GRAT can be a powerful strategy, as the IRS is forced to predict that very little, if any, assets contributed to a GRAT will remain for transfer to the donor’s beneficiary.  As a result, any appreciation in the value of the assets contributed to the GRAT in excess of the assumed rate of return set by the IRS will pass to the donor’s intended beneficiaries free of any gift tax implications.