There are various different acronyms that are used in estate planning, and they oftentimes shorten rather wordy names for certain types of trusts. We like to highlight one of these from time to time, and in this post we will look at the GRAT or grantor retained annuity trust.
When you have assets that exceed the amount of the estate tax exclusion, which is $5.25 million in 2013, you are going to look for ways to transfer assets to your loved ones in a tax efficient manner. The utilization of the “zeroed out” GRAT strategy could be an option.
With these trusts you accept annuity payments throughout the term. Once you convey assets into the trust the Internal Revenue Service will calculate the anticipated return using an estimate of the interest that the assets in the trust will earn over the duration of its term.
The percentage that will be applied is determined utilizing the Section 7520 rate that is in place during the month when the trust was created.
You arrange for the annuity payments to equal the entirety of the value of the trust including the estimated interest. You name a beneficiary who would assume ownership of any remainder that may be in the trust after its term expires.
You may question that last sentence. If the point is to take all of the money in the trust, what is the beneficiary going to get?
If the resources that have been conveyed into the trust outperform the IRS estimated interest, there will in fact be a remainder. The beneficiary would assume ownership of this remainder free of taxation.