Meurer & Potter Law Office, Denver, Colorado
A Grantor Retained Annuity Trust (“GRAT”) is a type of Irrevocable Trust. Established with the help of the Meurer & Potter Law Office here in Denver, it allows you to transfer income-producing assets to the trust for a set number of years, removing it from your estate while still receiving the income. The asset is usually stock, real estate, or a business.
- If the income is a set amount, the trust is called a GRAT
- If the income fluctuates, it is called a Grantor Retained Uni-Trust, or GRUT
When the trust ends, assets will be transferred to your beneficiaries, typically your children. Because they do not receive it until the end of a set number of years, the value of the gift is reduced. If you die before the trust ends, the asset will be in your estate similar to a qualified Personal Residence Trust.
A settlor establishes a GRAT by gifting an asset into the trust. They will then receive an annual payment from the annuity for a fixed period of time. At the end of the term, any remaining value in the trust is passed on to the beneficiaries of the trust as a gift. The IRS has a number of regulations governing how the remaining value of the trust is taxed at the end of the term. So, when the GRAT is established, a “gift value” of the GRAT is first calculated:
Initial contribution to the GRAT (principal) + theoretical interest earned – total annuity payments
To realize a tax benefit, the annuity payments total should equal the principal plus interest, which is determined by IRS regulations. So for tax purposes, the initially calculated gift value is zero ($0).
Depending on asset performance, it’s possible that the actual interest earned will be substantially higher than the theoretical interest. At the end of the term, your best case scenario is that the value remaining in the GRAT is larger than the initial IRS calculations that suggest a zero value. This remaining value can then be passed on to the beneficiary without incurring a gift tax.
Thinking a GRAT might help you pass along your legacy without taking a tax hit? Talk to our attorneys at the Meurer & Potter Law Office in Denver for a complete evaluation of your estate and assets. We’ll determine if a GRAT is right for you, or if there may be an even better option that we can help you establish.
Call or contact our offices today to schedule your free consultation: 303-991-3544