Grantor Retained Annuity Trust Pros And Cons
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How to fill out Grantor Retained Income Trust With Division Into Trusts For Issue After Term Of Years?
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FAQ
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.
The benefits to this tax treatment are twofold: First, this effectively allows more wealth to shift to heirs, because neither they nor the trust will bear the responsibility of these payments. Second, the IRS has ruled that when the grantor pays the income taxes, there is no additional gift made to the GRAT.
Additional considerations when using a GRAT From an income tax perspective, during the GRAT term, the GRAT's income tax liability flows through to the grantor; during the remainder term, the tax liability will either flow through to the grantor or be paid by the trust, depending on how the remainder term is structured.
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.
Tax Implications of the GRAT During the term of the GRAT, the Donor will be taxed on all of the income and capital gains earned by the trust, without regard to the amount of the annuity paid to the Donor.