Grantor Retained Interest Trusts (GRAT, GRUT, QPRT) Chapter 26 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company 1 – Irrevocable trust – Grantor transfers assets to trust – Grantor retains an interest for a fixed period of years – Income taxed to grantor during term – At the end of the period, the remaining principal will pass to a noncharitable beneficiary, such as a child or grandchild of the grantor – Grantor must survive the specified term to achieve transfer cost reductions What Are GRATs, GRUTs, and QPRTs?
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Grantor Retained Interest Trusts (GRAT, GRUT, QPRT) Chapter 26 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company1.
Grantor Retained Interest Trusts (GRAT, GRUT, QPRT) Chapter 26 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company3 Rapidly appreciating assets or large rapidly appreciating estate Client is single and has a substantial estate upon which estate taxes are certain to be paid Used as a “marital deduction substitute” by: –Wealthy widow or widower –Divorced individuals –Unmarried persons When is Use of a GRAT, GRUT, or QPRT Appropriate?
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• Married couple with an estate in excess of the couple’s combined unified credit equivalent– Eliminate or reduce taxes on death of second spouse to die
• Protect assets from a will contest, public scrutiny, or election against the will if grantor survives term of trust
When Is Use Of A GRAT, GRUT, Or QPRT Appropriate? (cont’d)
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• Income producing property is located in more than one state– Unification– Probate savings– Avoidance of ancillary administration
• A GRIT can still be used where the grantor wishes to benefit a niece, nephew, or unrelated person (someone other than a member of the family under IRC Section 2702)
When Is Use Of A GRAT, GRUT, Or QPRT Appropriate? (cont’d)
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• Client wishes to freeze the value of an asset for gift tax purposes and remove future appreciation from their estate– Use in conjunction with a recapitalization for added gift tax
leverage
When Is Use Of A GRAT, GRUT, Or QPRT Appropriate? (cont’d)
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• Irrevocable trust
• Assets should be appraised shortly before being placed in the trust
• Recommend someone other than the grantor or grantor’s spouse act as trustee to avoid additional income tax or estate tax exposure after the grantor’s retained interest has ended
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• Grantor retains right to annuity or unitrust payment for specified number of years (GRAT, GRUT)– Longer trust term means greater retained interest and a
lower taxable gift value
– Grantor must outlive the term of the trust
– Trustee has no discretion to withhold payments from grantor
– Trustee has no discretion to withhold trust property from a remainder person
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Applies
• To transfers in trust for the benefit of “family members” including:– Spouse of individual– Ancestor or lineal descendant of individual or individual’s spouse– Brother or sister of individual and their spouse
• Interests retained by “applicable family members” including:– Spouse of individual– Ancestor of individual or individual’s spouse– Spouse of ancestor
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• Irrevocable right to receive:– A fixed amount– At least annually– Payable to or for the benefit of the holder of the term interest– For a specified period
• Fixed amount determined as a percentage of the initial value of the trust or a fixed dollar amount
• Subsequent contributions are prohibited• Does not apply to a withdrawal right
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• Trust must contain the following provisions:– No distributions to other persons are permitted– Cash can be held for three months for purchase of initial or
replacement residence– Cash can be held up to six months for payment of trust
expenses, including mortgage payments or improvements– If property is sold or insurance proceeds received, a two year
replacement period is permitted– If property no longer used as personal residence, trust must
terminate and assets distributed within 30 days, unless converted to qualified annuity trust