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When most people realize that something they own is going to appreciate in value, they feel excited. But when an estate planning attorney hears this news, they think, How can I maximize and retain more of the appreciation?
That’s because estate planning specialists know myriad legal tools and strategies for achieving a wide range of financial goals—as well as their potential benefits and drawbacks. And because we know them, we want to share them with you.
This page discusses a special kind of trust that isn’t talked about often, called the grantor retained annuity trust. Primarily used by very wealthy individuals, it allows them to maximize—and transfer—appreciation on certain assets placed into an irrevocable trust.
Interested in learning more? The estate planning experts at Hunter Sargent, PLLC, would love to speak with you. In the meantime, keep reading to find out how a GRATs lawyer can help protect and grow your wealth.
With so many potential trusts to choose from, finding the best one for you can be a challenge—until you find the right estate planning lawyer. No matter what type of trust you need, we can help you maximize its effectiveness. Give us a call at (940) 594-7754 to get started.
A grantor retained annuity trust (GRAT) is an estate planning tool that can be used to minimize taxes on large financial gifts. Here’s how it works:
When a grantor sets up and contributes assets to a GRAT, they retain the right to receive the original value of those assets while also earning a return rate that is determined by the Internal Revenue Service (IRS). The GRAT is designed to expire after a predetermined amount of time, afterwhich the leftover assets (the appreciation of original assets) are distributed to the trust’s beneficiaries.
GRATs aren’t an ideal estate planning tool for everyone. They’re typically the most beneficial to wealthy individuals whose assets will be subject to significant estate tax liability when they die.
Essentially, a GRAT allows an individual to freeze the value of their estate by transferring some or all of the appreciation to their family members or beneficiaries. For example, a person may own an asset that’s worth $10 million dollars now, but they expect it to be worth $11.5 million in three years. Establishing a GRAT would allow them to transfer the difference to their heirs, tax-free, which is why it’s a useful addition to some tax planning strategies.
As you can imagine, these types of trusts are especially popular among individuals who own shares in startup companies, as the appreciation potential for a successful start-up is enormous. When the company does well, its appreciation outpaces the IRS rate of return, meaning the grantor can pass more money to their children without eating into their lifetime exemption from gift and estate taxes.
If you’re a wealthy person with a large estate, you may be thinking, GRATs sound great! Where do I sign? However, you should know that this particular type of trust comes with risks as well as benefits.
A GRAT’s annuity payments come from interest earned on the trust assets. If the grantor dies before the trust expires, its assets join their taxable estate, leaving the would-be beneficiary empty-handed. That’s why it’s essential for the grantor to establish a realistic term for the GRAT, but even short terms aren’t immune to life’s unexpected events.
For this type of trust to be successful, the assets must appreciate; if depreciation happens instead, it can be a disaster. The IRS’s 7520 (earning rate) should be another consideration for prospective GRAT users, as the rate over the last decade has been too low to offer maximum advantages.
GRATs (and estate planning in general) can leave you with a lot of questions about the best path forward. That’s why it’s smart to speak with an experienced GRATs lawyer in Denton, Texas, before making any big decisions. In the meantime, read through our most frequently asked questions about GRATs.
Yes, you can appoint a trustee or even co-trustees to trust administration. Although many grantors also act as their own trustee, it is not a requirement.
The terms for GRATs vary, but they are generally between two and 10 years in length. Your lawyer can help you determine the most beneficial term length for your specific situation and goals.
A “rolling GRAT” is a strategy whereby a grantor establishes a series of small, consecutive GRATs, each of which is funded by the previous trust’s annuity payments. This approach offers a few advantages, including its ability to minimize the risk of the grantor’s mortality during the term and to increase the grantor’s chances of transferring more wealth. Additionally, short-term GRATs generally experience less asset volatility than long-term ones.
Despite being irrevocable trusts rather than living trusts, GRATs allow for substitution of assets, as long as the value of the assets is matched by the value of replacement assets.
We get it: There’s a lot to consider when it comes to GRATs. As a relatively complex estate planning tool, these trusts are not for everyone, and they’re only as valuable as their assets. However, for wealthy individuals who want to benefit from appreciation, these tools can be an invaluable resource.
If you’re interested in exploring whether this trust is right for you, we encourage you to contact the Law Office of Hunter Sargent, PLLC. As top estate planning attorneys in Denton, Texas, we know everything there is to know about GRATs and similar tools. With a focus on client satisfaction, communication and excellence, there’s no better legal team around.
Life is uncertain. If you haven’t started planning your legacy, today’s a great day to start. Contact us online to schedule a consultation or give us a call at (940) 594-7754 to speak to one of our legal specialists directly.
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While this website provides general information, it does not constitute legal advice. Any communication with Hunter Sargent, PLLC via e-mail or through this website does not constitute or create an attorney-client relationship and is not privileged or confidential.