Grantor Retained Income Trust Pros And Cons
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FAQ
Using 'GRAT' correctly involves understanding its function as a financial tool in estate planning. It's essential to convey that GRAT stands for Grantor Retained Annuity Trust and not simply a generic term. When discussing a GRAT, you should emphasize its role in allowing the grantor to retain income while transferring assets to beneficiaries. To fully grasp the intricacies of a GRAT, consider exploring resources from UsLegalForms, which can provide insight into the overall grantor retained income trust pros and cons.
Here are two potential disadvantages: Potential income tax challenges: Establishing a grantor trust assumes that you have sufficient financial resources to pay income taxes on trust assets during your lifetime. ... Rules can change: If the rules for grantor trusts change, they may no longer offer the same advantages.
All assets within a GRAT lose the benefit of step-up in basis and are exposed to income taxes. While a GRAT helps assets avoid the estate tax, the assets in the GRAT lose the benefit of step-up in-basis which can expose the assets in the GRAT to state and federal income tax that they otherwise wouldn't be exposed to.
The primary disadvantage of a revocable trust is that the grantor is still obligated to assume the tax burden. The fact that the assets are still considered property of the grantor also means that the trust is still subject to an estate tax in the event of an untimely passing of the creator.
The biggest perceived disadvantage of a GRAT is that the grantor must survive the term of the GRAT in order to keep the GRAT assets out of his or her estate.
The advantages of GRATs are its tax benefits and flexibility. It enables swapping of assets, if they underperform expectations. The disadvantages of GRATs are an absence of tax benefits to the beneficiary, if the grantor passes away during the trust's term.