Question 1: What is a GRAT?
GRAT stands for grantor retained annuity trust, a specific kind of irrevocable trust that holds some substantial benefits for financial and estate planning purposes. As an irrevocable trust, a GRAT is something that should only be created after careful consultation with your attorney.
Question 2: How does a GRAT work?
The basic elements of a GRAT are very simple. When you decide to create a GRAT you take some of your property, transfer it to the trust, and direct the trust to repay you a portion of that property as income. The trust will usually last either a specific number of years or for the rest of your life, during which time you get to receive income from the property. Once the trust ends, the remaining trust property is then transferred to a specified beneficiary. Those beneficiaries are typically your children, grandchildren, or someone else you select.
Question 3: How does a GRAT impact my taxes?
One of the great benefits of a GRAT is that it allows you to gift property to beneficiaries with some significant benefits. When you calculate the value of the property transferred to the trust for estate or gift tax purposes, you base it on the value of the asset minus the value of the annuity you retain. In some situations you may be able to value your gift for estate tax purposes at close to zero, while still being able to receive a significant income during the GRAT’s lifetime.