PFwise.com
Search
  • Home
  • Blog
  • Tools
  • Know-how
    • Insurance 101
    • Annuity 101
    • College Planning
    • Real Estate
    • Retirement Planning
    • Smart Investment
    • Stock Ideas
    • Tax Planning
  • About Us
  • 中文
  • Resources
    • Personal Finance Reading List
    • Financial Aid Resources
    • Personal Finance Calendar
    • Retirement Planning Calendar
    • ETF list
    • Financial Glossary
  • Newsletters Archive

6 Trusts You Should Know About (V)

10/6/2013

0 Comments

 
Picture
5. Grantor retained annuity trust (GRAT)

The grantor retained annuity trust (GRAT) is an estate planning technique that can be used to transferfuture appreciation to family members, or others, free of gift and estate taxes provided the grantor survives the trust term.

TRUST ESTABLISHED. In order to implement a GRAT, the grantor creates an irrevocable trust for a specified number of years, names his children as trust beneficiaries, and transfers to the trust property that has a potential for substantial appreciation. The grantor retains the right to receive, for the term of the GRAT, a “qualified annuity interest” based on either a specified sum or fixed percentage of the initial value of the property transferred to the trust. This annuity is mandatory and must be paid at least annually. The annual payment may be increased, provided the increase is not greater than 120 percent of the prior year’s payment. Additional contributions to the GRAT are not permitted.

Only the value of the remainder interest payable to the trust beneficiaries is subject to the gift tax. This value is determined by subtracting from the fair market value of the property transferred to the trust the present value of the annuity retained by the grantor. The value of this annuity is increased by a longer-term trust, larger annuity payments, and lower assumed interest rate used to make the present value calculation. To summarize, gift tax exposure is reduced if the present value of the retained annuity is increased and the value of the remainder interest is decreased:

                                                                           ↑                                                                      

             Exposure to Gift Tax                  Value of Retained Annuity            Value of Remainder Interest

                             ↓                                                                                          ↓

DURING TRUST TERM. Tax-free annuity payments are made to the grantor. Trust assets may be used to make these payments. For federal tax purposes the GRAT is considered a grantor trust, meaning that the grantor pays taxes on all trust income. Should the grantor die before the end of the trust term, the annuity payments continue to be made to the Grantor’s Estate and the property is subject to estate taxes.

AT END OF TRUST TERM. Any property remaining in the trust, including appreciation and earnings, is paid to the trust beneficiaries (i.e., the remainder interest). Provided the grantor lives to the end of the trust term (and does not die within 3 years of the transfer), this property is not subject to estate taxes.

Information required for analysis & proposal

1. Fair market value of property transferred to trust (provide appropriate appraisals).

2. Term of trust (in years).

3. Annuity to be paid (as dollar amount or percent of initial trust value).

4. Payment frequency (annually, semiannually, quarterly, or monthly).

5. Increase in annuity as a percent, if any (not to exceed 120 percent of prior year).

6. Age of grantor (if grantor retains reversion).

7. Date of transfer to trust (needed to set payment dates and determine Section 7520 interest rate as published monthly by IRS).


0 Comments



Leave a Reply.

    Author

    PFwise's goal is to help ordinary people make wise personal finance decisions.

    Archives

    April 2022
    March 2022
    February 2022
    January 2022
    December 2021
    November 2021
    October 2021
    September 2021
    August 2021
    July 2021
    June 2021
    May 2021
    April 2021
    March 2021
    February 2021
    January 2021
    December 2020
    November 2020
    October 2020
    September 2020
    August 2020
    July 2020
    June 2020
    May 2020
    April 2020
    March 2020
    February 2020
    January 2020
    December 2019
    November 2019
    October 2019
    September 2019
    August 2019
    July 2019
    June 2019
    May 2019
    April 2019
    March 2019
    February 2019
    January 2019
    December 2018
    November 2018
    October 2018
    September 2018
    August 2018
    July 2018
    June 2018
    May 2018
    April 2018
    March 2018
    February 2018
    January 2018
    December 2017
    November 2017
    October 2017
    September 2017
    August 2017
    July 2017
    June 2017
    May 2017
    April 2017
    March 2017
    February 2017
    January 2017
    December 2016
    November 2016
    October 2016
    September 2016
    August 2016
    July 2016
    June 2016
    May 2016
    April 2016
    March 2016
    February 2016
    January 2016
    December 2015
    November 2015
    October 2015
    September 2015
    August 2015
    July 2015
    June 2015
    May 2015
    April 2015
    March 2015
    February 2015
    January 2015
    December 2014
    November 2014
    October 2014
    September 2014
    August 2014
    July 2014
    June 2014
    May 2014
    April 2014
    March 2014
    February 2014
    January 2014
    December 2013
    November 2013
    October 2013
    September 2013
    August 2013
    July 2013
    June 2013
    May 2013

    Categories

    All
    Annuity
    Book Reviews
    College Finance
    Finance In Formula
    Financial Scams
    For Entrepreneurs
    Healthcare
    Insurance
    Investment
    Miscellaneous
    Real Estate
    Retirement
    Savings
    Savings Ideas
    Stock-ideas
    Tax
    Tax-related

    RSS Feed

Copyright © 2013 - 2022 PFWise.com, All Rights Reserved. 
IMPORTANT DISCLOSURES
PFwise.com does not provide investment, tax, or legal advice. The information presented here is not specific to any individual's personal circumstances.

To the extent that any material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
About Us | Contact Us 
中文