Grantor Retained Annuity Trusts (GRATs)

Grantor Retained Annuity Trusts (“GRAT”)
Under a GRAT, the owner of property transfers all or a portion of their property into an irrevocable trust(s) that satisfies the requirements of Internal Revenue Code Section 2702 and its corresponding regulations.  The GRAT’s terms specify that the grantor retains the right to receive annual annuity payments for a designated period of years.

GRATs are structured to last for any number of years.  However, the length of the term will affect the interest rate of return required to be earned by the Grantor.  The Internal Revenue Service under Section 7590 categorizes these terms as: Under 3 year term, 3-9 year term and greater than 9 years.  Each category has a different applicable interest rate.  

To value the annuity stream, the IRS uses the interest rate determined under Section 7520 in effect for the month of the transfer to the trust.  By varying the trust term and the amount of the annuity, it is possible to reduce the value of the remainder interest (subject to gift tax) to a relatively small amount – even to zero as a result of the Tax Court’s decision in the Walton case.

If the grantor survives the end of the GRAT period, all assets then remaining transfer to the grantor’s designated beneficiaries (or to trusts for their benefit) with no transfer taxes.  If the property transferred to the GRAT produces income or appreciation greater than the IRC Section 7520 rate in effect on the date of the transfer, the excess value will pass to the beneficiaries chosen.  The beneficiary may be a trust of the Grantor.

If the GRAT is so structured so that the present value of the annuity payments equals the initial value of the interests in the property to the GRAT (after taking into affect all applicable valuation discounts), the transfers of such interests to the GRAT will not generate any gift tax liability thus reducing the amount of the individual’s unified credit amount.  

Based in Raleigh, North Carolina we assist clients throughout Wake County, NC and Johnston County, NC as well as the cities of Cary, NC, Morrisville, NC, and Clayton, NC.

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