Although the recent tax law changes have made estate planning a more complex exercise, Grantor Retained Interest Trusts (GRT) remain a useful estate tax planning tool. A Grantor Retained Interest Trust is an irrevocable trust to which a grantor (the creator of the trust) may transfer assets, such as a personal residence, closely-held business interest, or other assets. These assets should have appreciation potential and/or generate income.
They are created through one of the following vehicles: Grantor retained income trusts (GRITs), related qualified personal residence trusts (QPRTs), grantor retained annuity trusts (GRATs), and grantor retained unitrusts (GRUTs). All of these vehicles can be used to shift asset appreciation from the grantor’s estate, resulting in a reduced transfer tax cost while providing the grantor with income for the trust term. When assets are placed in one of these trusts, the actuarial value of what will pass to the beneficiaries is treated as a gift. Depending on factors such as interest rate and term of the trust, gift taxes can be greatly reduced. The disadvantage is that if the grantor dies before the termination of the trust, the value of the assets held in the trust on the date of the grantor’s death is includable in the grantor’s gross estate.
With a grantor retained interest trust, a grantor transfers appreciating assets into a trust for a term of years while retaining an income interest and naming remainder beneficiaries who are not family members. A grantor retained interest trust cannot be used to pass wealth to members of the family so they may not be for every estate plan.
With QPRTs, a personal residence may be put into a trust that benefits a family member while the grantor continues to live in the home. At the end of the term, the beneficiary becomes the owner of the residence. If the grantor wishes to live in the residence after the trust ends, he or she needs to pay fair market rent to the beneficiaries.
The more commonly used trusts are GRUTs and GRATs. With a GRUT, the grantor receives an annual payment equal to a fixed percentage of the net fair market value of the trust assets, determined annually. A GRUT is used when the grantor wishes to participate in the growth of the assets inside the trust. A grantor may add assets to the GRUT after its creation.
With a GRAT, the grantor receives an annual payment equal to a fixed percentage of the original assets placed in the trust for the term of the trust. A GRAT is used when a grantor wants a guaranteed annual payment. For remainder beneficiaries to benefit from the GRAT, the assets need not grow as fast as assets held in a GRUT because annual payments are fixed and do not vary with the growth of the trust assets. Unlike the GRUT, additional assets cannot be added to the GRAT after its creation. A popular form of GRAT is the zeroed-out GRAT where the remainder interest is valued at zero or near zero. Congress has tried to pass legislation to require a minimum term of at least 10 years for GRATs and a remainder interest with at least some minimal value. For this reason, it may be prudent to create a zeroed-out GRAT in the near future.
If your objective is to shift appreciating assets to family members at a reduced transfer cost, you may want to consider a Grantor Retained Interest Trust (GRIT), or a GRAT, GRUT, or QPRT.
For more information on a grantor retained interest trust strategy or the other iterations discussed in this article, contact our Tax Strategies practice at 215.441.4600.
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