GRATs (Grantor Retained Annuity Trust) Are Popular Estate Planning Tool For Those With Large Estates
It has long been a strategy for people with wealth to use what is known as a special trust in order to pass property on while also avoiding paying state taxes. A recent article highlights this practice, and how prevalent it is, especially among the richest people in America.
Trusts are Private
One reason why the report is newsworthy in the first place is because trusts are not public information. That gives them a benefit over wills or other estate documents. Unless there is a lawsuit or something that requires a public filing, generally, trusts, who leaves them, and who gets the property in a trust, are all private.
What are Estate Taxes?
Estate taxes are levied on a person’s estate after they pass away. Congress created the gift tax when people tried avoiding the estate tax by simply gifting property to relatives before they passed away. Estate taxes only affect the very rich, at least for now. Today, you need to pass on $11.7 million to relatives before you will be affected by the estate tax.
Using a GRAT to Avoid Estate Taxes
The recent report revealed that a large percentage of the richest people in America have used what is known as a grantor retained annuity trust, or GRAT. These trusts can help avoid or reduce estate taxes.
With a GRAT, the person with the wealth (the grantor) would place stock or some other asset that appreciates in value into a GRAT. The GRAT will last for a set number of years, and during the term of years, the GRAT will pay an annuity to the person who created it. At the end of the term, everything held inside the GRAT is now outside of the grantor’s estate, and all future growth will be free from gift and estate tax.
At the time of creation, the assets placed into the GRAT will be considered a lifetime gift made by the grantor, and the grantor will pay gift tax on the value of the contribution to the GRAT. However, because the grantor is retaining an interest in the trust assets (the grantor will be paid an annuity from the trust for the term of years), the value of the contribution will be reduced by the value of the retained interest. If you set the annuity amount high enough, you can reduce the value of the contribution to 0, which reduces your initial gift tax obligation to 0.
If the assets appreciate fast enough, they will grow faster than the annuity payments made to the grantor, and the trust will be left holding assets after the annuity payments end. Any assets held in the trust at the end of the term are no longer part of the grantors estate and so they pass to beneficiaries estate tax free.
Military contractors, politicians, tech geniuses, and media, movie and TV stars all have used some form of a GRAT, according to the article.
Call the Torrance estate planning attorneys at Samuel Ford Law today for advice on the best way to maximize your estate for your beneficiaries and family.