Creating a successful estate plan requires you to do more than just decide how your estate will be divided after you are gone. It also requires you to contemplate ways to protect your estate assets wile you are alive so they are available to be passed on after your death. One potential threat that all taxpayers should be aware of is the potential impact that federal gift and estate taxes might have on their estate. A Hartford trust attorney at Nirenstein, Horowitz & Associates, P.C. explains how a Grantor Retained Income Trust (GRIT) can help your estate avoid taxes.
Do I Need to Worry about Estate Taxes?
Every taxpayer’s estate is potentially subject to federal (and sometimes state) gift and estate taxes. At the time of your death, your estate assets will be valued. If the value of your estate exceeds the current lifetime exemption amount then your estate will owe estate taxes to Uncle Sam at the rate of 40 percent. It’s not difficult to see how an estate tax obligation could dramatically diminish the value of the estate you leave behind. Moreover, it is impossible to know with certainty what your estate will be worth nor what the current lifetime exemption amount will be at the time of your death. For these reasons, it is wise to plan for the possibility that your estate will owe estate taxes. One way to do that is to create a GRIT.
How Does a GRIT Work?
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.
How 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.
By way of illustration, 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.
Things to Consider before Choosing to Create a GRIT
Two important things you need to consider before deciding that a GRIT is right for your estate plan. First, there are several categories of people you cannot name as a beneficiary of the trust, including 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. In addition, if you do not outlive the initial term, your estate will not reap the promised tax benefits.
Contact a Hartford Trust Attorney
For more information, please join us for an upcoming FREE seminar. If you have additional questions or concerns about incorporating a Grantor Retained Income Trust into your estate plan, contact an experienced Hartford trust attorney at Nirenstein, Horowitz & Associates, P.C. by calling (860) 548-1000 to schedule an appointment.
Mr. Horowitz was awarded his Juris Doctor degree with honors from the University of Connecticut School of Law. While attending law school, Mr. Horowitz received the American Jurisprudence Award in Legal Ethics and the Nathan Burkan Award.
After graduation from law school, Mr. Horowitz continued his legal education at New York University School of Law where he received a Post Doctorate Law Degree in Taxation. He has also recently received a national achievement award.
Mr. Horowitz is admitted to practice before all the state courts in the State of Connecticut and the United States District Court.
Mr. Horowitz was selected for Super Lawyers in 2021.
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