For many families, an estate plan based upon a revocable living trust may be all that is needed to protect their assets from death taxes. However, for folks with larger estates, it may make sense to look for ways to transfer assets in a tax-free manner. Though there is a gift tax in place there are ways to facilitate tax-free giving if you take the appropriate actions. One such strategy involves zeroing out a grantor retained annuity trust, often abbreviated as a GRAT.
How does it work? After funding the GRAT, the donor receives annuity payments annually. A family member is named as the beneficiary. This beneficiary assumes ownership of any funds that may happen to remain in the trust after the trust term expires.
Because of the potential for the transfer of assets to the beneficiary the IRS considers the act of funding the trust to be a taxable gift. They also apply anticipated interest to the taxable value of the initial contribution into the trust. The GRAT’s terms provide for the annuity payments to equal the entirety of this taxable value over the term of the trust, “zeroing it out”.
The key is to fund the trust with assets that are expected to appreciate considerably over the term of the trust. If this appreciation exceeds the original IRS estimate, a remainder will exist upon the expiration of the trust term. The beneficiary will assume ownership of this free of taxation.
Ti find out more about this and other advanced estate planning strategies, arrange for a consultation with an experienced and qualified estate planning attorney.