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Why Grantor Retained Annuity Trusts Could Transfer Significant Wealth to Beneficiaries If Set Up Right Now


In the wake of the coronavirus, a number of Americans are looking into whether a Grantor Retained Annuity Trust (GRAT) makes sense for them and their estate planning in order to allow them to pass the most onto the next generation without also passing on any estate or gift taxes. The conditions surrounding the pandemic have made right now an ideal time to consider these trusts because asset values are depressed and the IRS hurdle rate is extremely low. This means that, after the pandemic, if the rates of return are even average, significant wealth could be transferred to your beneficiaries.

How It Works

In a nutshell, this is how a GRAT works:

  • The grantor transfers assets (ideally those with significant growth potential or high-incoming producing assets) into an irrevocable trust for a designated number of years
  • Assuming proper planning in the creation of the trust, a nominal amount of the value of the transfer to the trust will constitute a taxable gift to be applied against the gift tax exemption amount
  • The annuity paid by the grantor each year is calculated by the IRS using Internal Revenue Code Section 7520. The lower the “hurdle” rate, the more likely the trust has a chance of succeeding. To give you a sense of how low the rates are right now: The May 2020 rate is .8 percent, whereas in May 2019, it was 3.2 percent. When investments outperform the current rate, the beneficiaries’ benefit; otherwise, the assets go back to the grantor by way of annuity payments
  • Once that the trust ends after the designated number of years, the beneficiaries receive the remaining assets free of estate and gift taxes. In choosing to pass assets on this way instead of owning these assets as part of one’s estate, you can save significant funds by avoiding federal estate taxes

What Grantors Should Know Before Pursuing A GRAT

There are of course some risks associated with these trusts. For example, if the  assets do not  outperform the hurdle rate, beneficiaries do not receive anything and the grantor receives all of the assets back. At that point, the grantor is only out the cost of preparing the documents. Therefore, in order to be successful, grantors need to choose assets with strong appreciation potential (known as “high yield assets”).

In addition, if the grantor dies before the trust ends, the beneficiaries also do not receive anything, as the assets become part of the grantor’s estate. Grantors should also be aware that they will have to pay income taxes on income generated  by the assets during the term of the trust.

Contact A Florida Estate Planning Attorney Who Cares

If you live in Florida and have any questions or concerns about estate planning and/or trusts, contact our Sarasota wills & probate attorneys at Suncoast Civil Law today. We can work with you to craft or revise a plan that meets your specific needs.