Dear Garden State Trust:
What is a GRAT? Is this something I should be considering?
—Curious About Trusts
GRAT stands for Grantor Retained Annuity Trust. This is a temporary trust that may be used to transfer large sums free of federal gift or estate tax. The Grantor establishes the trust for a specific term of years, while retaining the right to receive an annuity from the trust while it exists. When the trust ends, the assets pass to the remainder beneficiaries, typically family members. The value of that remainder interest is a taxable transfer subject to gift tax when the trust is funded. However, by changing the duration of the trust or the size of the annuity, the value subject to gift taxes may be brought down to nearly zero.
According to recent reporting in Pro Publica, more than half of America’s richest 100 families have used GRATs or similar trusts to move wealth within the family at low tax costs. For example, Steve Jobs’ widow, Laurene Powell Jobs, reportedly transferred half a billion dollars to family and friends after his death via GRATs, saving some $200 million in gift tax obligations.
However, tax legislation that is currently being considered by the Congress would curtail the tax benefits of GRATs, and there is an open question about whether existing GRATs might be adversely affected. Until this gets sorted out, you should be cautious about this strategy.
See your estate planning advisors to learn more.
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