The Virtues Of A GRAT

Posted by Jason Pfannenstiel on November 28, 2014

The Virtues of a Grantor Retained Annuity Trust


Living trusts are a great financial planning tool that are a great way to take care of your family for generations to come.

A living trust can:

  • Ensure the orderly transfer of assets to family members and beneficiaries
  • Minimize estate taxes
  • Protect assets from creditors and court challenges
  • Avoid the time-consuming and costly process of probate, the court-supervised process of administering an estate that can take up to six months or more.

Less well-known, however, is a special type of trust known as a Grantor Retained Annuity Trust (GRAT). For those who hold private stock in the companies they own or work for, a GRAT has special benefits worth considering.

In fact, a GRAT is exactly what some of the nation’s wealthiest people are using to manage estate taxes. Facebook CEO Officer Mark Zuckerberg and Goldman Sachs CEO Lloyd Blankfein, are among the business leaders who have set up GRATs, according to Bloomberg.

Have It Both Ways

You don’t have to be megarich to benefit from a GRAT.

A single taxpayer with assets of more than $5.25 million and a married couple with more $10.5 million could be subject to 40% federal estate taxes if they don’t take action to minimize estate taxes.

A GRAT can be an effective solution for investors who want to retain control of their assets, but for estate tax planning purposes, want to transfer most of the appreciation of those assets out of their taxable estate.

With a GRAT, the owner retains an interest in the assets before they are passed to the beneficiaries of the trust. This structure allows for the transfer to be kept private and can protect the assets against creditor claims.

How It Works

An individual sets up a GRAT and then makes an irrevocable gift of assets to the trust. That means once the assets pass into the GRAT, they pass out of the individual’s estate. The client then selects a trustee to administer the trust assets.Peac-of-Jason_blog,_peace_of_mind,_11-24-14

Once the assets are in the trust, an income stream is paid from the trust to the individual who establishes the trust for a specific number of years. This is the “retention period.” The “annuity” paid to the individual can be a fixed dollar amount or a percentage of the value of the assets initially contributed to the trust.

At the end of the retention period, the assets of the trust, including all of the appreciation, are transferred to the beneficiaries of the trust and out of the client’s estate.

Show Me The Money

An example illustrates how the process works.

Assume an owner transfers stock worth $1 million to a GRAT. The trust stipulates payments back to the owner (the annuity) of $500,000 at the end of Year 1 and $600,000 at the end of Year 2.

In basic terms, the value of the assets, plus minimal appreciation, are returned to the owner. The majority of the appreciation (and any future appreciation) is transferred out of the owner’s taxable estate and to the beneficiaries.

The possible benefits of creating a GRAT can be demonstrated by the following hypothetical appreciation rates:Trust_chart_for_Jason_blog,_11-24-14The bottom line: For certain individuals, a GRAT makes very good sense.  Thoughtful trust planning is the gift that will keep on giving for everyone you care about.


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Topics: Estate Planning

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