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A grantor retained annuity trust (GRAT) is an estate planning tool that is used to reduce the impact of estate or gift taxes. This type of trust is designed to provide a regular income to the grantor for a specific period of time. After the time has elapsed, the remaining assets in the trust are passed on to a beneficiary.
Every grantor retained annuity trust has to have a grantor, a trustee and a beneficiary. The grantor is the individual that sets up the trust. This individual transfers a certain amount of assets into a trust. The assets are then taken care of by a trustee. After the conditions of the trust have been met, the assets are then transferred to the beneficiary of the trust.
In a grantor retained annuity trust, the beneficiary has to be a family member of the individual who set up the trust. The GRAT is a type of irrevocable trust arrangement. It is irrevocable, so the assets that are transferred into it are permanently removed from the estate of the grantor. The grantor is removing the assets from his or her estate, so no estate or gift taxes will be due on these assets when they are transferred to the beneficiary.
When the grantor retained annuity trust is initiated, a certain sum of money will be transferred to an account in the name of the trust. A specific term of years will be established to govern the life of the trust. An annuity payment also will be established. This amount of money will go to the grantor every year for the life of the trust. After the annuity payments have been made for the specified number of years, the remainder of the trust will be transferred to the beneficiary.
Many people prefer this estate planning tool because it allows them to create a regular income and provide a tax-free gift for their beneficiaries at the same time. If the grantor had a sizable estate, his or her beneficiaries might have to pay estate taxes on the inheritance if he or she did not use a grantor retained annuity trust. If the grantor passes away before all of the annuity payments can be made, the balance of the account automatically will be transferred to the beneficiary of the trust. In order to initiate this type of trust, an estate planning attorney should be consulted.