Tax avoidance should be one of the most important components of an estate plan for anyone with a moderate to large estate given that all estates are subject to federal gift and estate taxation upon the death of the taxpayer. Your estate will go through the legal process known as probate shortly after your death. During the probate process, your estate assets will be inventoried and valued. If the value of your probate assets exceeds the current lifetime exemption amount, those remaining assets will potentially be subject to taxation at the rate of 40 percent. One estate planning tool that can provide tax avoidance benefits is a Grantor Retained Income Trust, or GRIT. The Port St. Lucie trust lawyers at Kulas & Crawford explain how a Grantor Retained Income Trust (GRIT) works and why you might want to include one in your estate plan.
What Is a GRIT?
A GRIT is a specialized type of irrevocable trust that allows the Grantor (creator of the trust, also referred to as the “Settlor”) to transfer assets into the trust while retaining the right to receive all of the net income from the trust assets for a fixed term of years, referred to as the “initial term.” Income from the trust is distributed to the Grantor at least annually during the initial term. At the end of the initial term, the remaining principal is either distributed to the trust beneficiaries or remains in the trust for the benefit of those beneficiaries. The primary benefit of a GRIT is that if the Grantor survives the initial term, the value of the principal held in the GRIT is excluded from the Grantor’s estate for federal gift and estate tax purposes.
Why Is a GRIT Different from Other Trusts?
A GRIT is different from other similar trusts in the manner in which the principal is valued. The assets transferred into the GRIT are valued at a discount. The value of the discount depends on the length of the initial term of the GRIT, and the applicable federal rate in effect in the month that the GRIT is established. The transfer of assets to a GRIT constitutes a gift equal to the total value of the assets transferred to the GRIT, less the present value of the retained income interest held by the Grantor for the initial term. If the Grantor survives the initial term, the assets comprising the GRIT will pass to the designated remainder beneficiaries at a reduced gift tax value.
One important thing you need to know about a GRIT is that there are rules regarding who you can name as beneficiaries in the trust agreement. You cannot name your spouse, your ancestors or the ancestors of your spouse, any lineal descendant of yours or your spouse, any sibling of yours or your spouse, or the spouses of any of the foregoing persons. You can include as beneficiaries lineal descendants of siblings, (nieces and nephews) relatives even more distant than nieces and nephews, or friends of yours or your spouse.
A GRIT Example
To better understand the advantage of a GRIT, let’s look at an example. Imagine that you establish a 15-year GRIT and transfer $100,000 of assets into the trust. As the Grantor, you will receive the income from the GRIT during the initial term. Further, assume that the applicable federal rate in the month that the assets were initially transferred by the Grantor to the GRIT is five percent. The present value of the retained income interest is $66,007 so that the amount of the gift upon creating the GRIT is $33,993; however, if you survive until the end of the initial term, the remainder beneficiaries will receive $100,0000 plus all capital growth.
Disadvantages of a GRIT
A GRIT has two primary disadvantages that should also be considered. First, it is an irrevocable trust, meaning if your personal circumstances change, you cannot make corresponding changes to the trust. For example, if your favorite nephew falls out of favor, he cannot be removed as a beneficiary. The other important disadvantage is that you will not receive the sought after tax advantages if you do not survive the initial term.
Contact Port St. Lucie Trust Lawyers
For more information, please join us for an upcoming FREE seminar. If you have additional questions or concerns about how a Grantor Retained Income Trust might fit into your estate plan, contact the experienced Port St. Lucie trust lawyers at Kulas & Crawford by calling (772) 398-0720 to schedule an appointment.