Can a GRAT Help My Tax Liability?

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A GRAT can serve as helpful estate planning tool for some people.

Federal estate taxes may be problematic for some because of the current low interest rates.

As a result, many are looking for a way to reduce their tax liability.

Finding the best means of doing so can be tricky.

According to a recent This Week Community News article titled “Estate planning with grantor retained annuity trust,” one option may be a Grantor Retained Annuity Trust.

A GRAT can help you transfer money to heirs.
A GRAT allows you to give to your heirs assets and their appreciated growth.

A Grantor Retained Annuity Trusts is also known as a GRAT.

What is a GRAT?

A GRAT involves an irrevocable trust.

The trust is created for the benefit of children or other beneficiaries.

The grantor transfers assets into the trust but retains an annuity interest for a set number of years.

Consider this example.

Someone owns $800,000 in stock for a closely-held business.

This person works with an experienced estate planning attorney who creates a ten-year GRAT.

This person then transfers non-voting stock in this business to the GRAT.

The trust then pays an annuity amount to the individual for ten years.

What is an annuity amount payment?

An annuity amount payment involves the GRAT paying a set percentage of the assets transferred into it to over a given period of time.

After ten years, the trust assets will be transferred to the beneficiaries.

The beneficiaries will receive the interest if the growth exceeds one percent.

What are potential problems with a GRAT?

If the grantor dies before the GRAT terms end, the entire value of the asset will be included in the estate of the individual.

This means the GRAT will not serve its purpose.

If the plan does work, the assets added and all of the growth will be removed from the estate of the individual.

This could save the family up to 40 percent of the value of the stock.

If the federal estate tax exemption is lowered after its set expiration in 2026, a GRAT could prove a helpful tool.

Discuss your situation and your goals with an experienced estate planning attorney to determine whether a GRAT would be a wise option.

Reference: This Week Community News (Sep. 6, 2020) “Estate planning with grantor retained annuity trust”

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