This is a trust set up by a person, the grantor, where he or she receives income (also called an annuity) from the trust for a fixed period of time; at the end of that specified period of time, the remaining balance of the trust passes to designated beneficiaries. When the GRAT is set up, the gift tax value of the trust is calculated using the principal value of the gift plus the expected interest of that trust based on the applicable federal interest rates, but subtracting the annuity payments that would be made through the end of the term. The calculation of the amount of the annuity that the grantor will retain is the most important tax planning part of this technique and is how the trust can yield the most tax savings. It is also important to note that this is an irrevocable trust, meaning it cannot be terminated once it is completed without the permission of the beneficiary. After transferring his or her interests to this trust, the grantor essentially loses ownership rights of those assets and the trust.
It is important that this type of trust is carefully and skillfully drafted. The GRAT can be a valuable tax planning tool for potentially large gift tax savings. We can assist you in drafting, funding and utilizing this complicated, but useful trust to your benefit.
We invite you to learn about our estate planning services by contacting us online or by phone 310-517-8600. Based in Torrance, our lawyers serve clients throughout Southern California.