Scranton Grantor Retained Annuity Trust (GRAT) Lawyer
A grantor retained annuity trust (GRAT) is a specific type of irrevocable trust that can potentially allow someone to pay little or no gift or estate taxes when large sums of money are passed from one generation to the next.
How Grantor Retained Annuity Trusts Work
Grantor retained annuity trusts are established when the grantor funds it with securities, cash, or other assets they choose to pass on to their beneficiaries.
The grantor will receive annuity payouts for whatever period they decide, which is typically anywhere between two and five years. The total value of annuity payments is based on the initial investment amount plus any interest calculated at the Internal Revenue Code 7520 rate. The IRS determines the interest rate monthly. When the annuity period ends, the trust’s remaining value is passed on to the named beneficiary, which is usually a family member.
Essentially, the grantor will likely receive all their money back since grant retained annuity trust creators are betting on the value of assets appreciating at a rate higher than predicted based on the Internal Revenue Code 7520 rate for the month the trust was created. Any leftover money when the annuity period ends will go to the listed beneficiaries, which is not subject to gift tax.
Potential Benefits of Grantor Retained Annuity Trusts
Grantor retained annuity trusts have a number of potential advantages, including:
- GRATs can be structured in a way that provides minimal negative risks, other than administrative and legal costs.
- They can be structured in such a way that there is no gift tax liability for asset transfers to other family members.
- During the annuity term, the transferor is allowed to swap assets with the GRAT without any risk of capital gains or income tax.
- They are sanctioned by the Internal Revenue Code.
- If the IRS successfully challenges the valuation of transferred assets, there is an automatic adjustment which can prevent negative consequences of gift taxes.
Potential Drawbacks of Grantor Retained Annuity Trusts
There are several important potential drawbacks with grantor retained authority trusts that you should know:
- The grantor, or trust-maker, may die during the grantor retained annuity trust term. In the event the creator of the trust passes away before all annuity payments are made, the trust will be considered part of the estate. This means it will be subject to estate taxes.
- Assets transferred into the grantor retained annuity trust could appreciate at a rate that is less than the Section 7520 rate. In the event this happens, the grantor will receive back the trust’s property at a depreciated value. He or she will only be responsible for the legal fees paid to establish the trust.
Grantor retained annuity trusts are not the right option for everyone. The grantor has to be willing to take a risk on whether the assets in the GRAT will appreciate more than the Section 7520 interest rate.
Retaining a Pennsylvania Estate Planning Attorney
If you have questions on grantor retained annuity trusts or other types of trusts, it’s important to speak with a Pennsylvania estate planning attorney. Contact Haggerty Hinton & Cosgrove, LLP at 570-344-9845 to schedule a consultation.