Grantor Retained Annuity Trust (GRAT)

The GRAT is one of the fundamental estate planning tools. In a GRAT, the grantor transfers an appreciable asset (usually stock) into trust, and the trust pays the grantor back an annuity that equals the value of the stock plus interest. The interest rate is a selected 7520 rate set by the federal government. Thus, the GRAT is more advantageous in low interest rate environments.

One of the most common ways in which estate planning attorneys use the GRAT is a 2-year zeroed out GRAT. The objective is to get the appreciation of a specific asset out of the grantor’s estate. However, not all of the appreciation would leave the grantor’s estate, only the amount in excess of the 7520 rate.

The GRAT provides a number of benefits that clients find very attractive. One, the GRAT does not use any federal estate tax credit, and thus there is no risk of wasting the credit should the GRAT fail. Two, if the GRAT does fail, you can use the annuity to fund a rolling GRAT, which gives the next GRAT a higher chance of success. Three, there are a number of ways for a skilled estate planning attorney to maximize the chances of a successful GRAT.

However, like every estate planning technique, there is always a trade-off. One, the 7520 rate is higher than the interest rate associated with an Intentionally Defective Grantor Trust (IDGT), meaning the IDGT is usually a more efficient method of estate planning. Two, the grantor must survive the term of the GRAT, otherwise the amount remaining in the GRAT reverts back to the grantor’s estate. Three, the grantor needs to have additional capital ready to be substituted into the GRAT.

If you are interested in learning more about GRATs, contact the Law Office of Kiran Mahal: https://www.mahallaw.com/contact/