A Colorado Granter Retained Annuity Trust (GREAT) is a legally recognized estate planning tool that allows individuals to transfer assets to beneficiaries while minimizing estate and gift taxes. It is specifically structured to help individuals in Colorado protect their assets and control their wealth distribution. The primary purpose of a Colorado GREAT is to allow the granter to transfer appreciating assets to beneficiaries while retaining an annuity income stream for a predetermined period. By setting up a GREAT, the granter can transfer assets out of their taxable estate, potentially reducing estate taxes. The annuity payments received by the granter are determined at the creation of the trust and are based on factors such as the trust's value, duration, and interest rates. There are different types of Colorado Grants, each offering distinct advantages based on the granter's financial goals: 1. Standard GREAT: This is the most basic type of GREAT, where the granter retains a fixed annuity payment throughout the trust's duration. Any growth that exceeds the Section 7520 rate, set by the IRS, goes to the beneficiaries without gift tax consequences. 2. Zeroed-out GREAT: In this type of GREAT, the annuity payment is set to exhaust the value of the trust entirely by the end of the trust's term. This effectively eliminates any gift tax liability, making it a popular choice for granters wanting to transfer assets with minimal tax consequences. 3. Rolling GREAT: Also known as a "cascading GREAT," this strategy involves establishing a series of sequential Grants. Each trust period starts immediately after the previous trust ends, allowing the granter to transfer assets to beneficiaries over an extended period while potentially extending the tax benefits. 4. Charitable GREAT: This type of GREAT is designed to benefit both the granter's beneficiaries and a charitable organization. The granter retains annuity payments for a specific term, after which the remaining trust assets are distributed to both beneficiaries and the chosen charity. By using a Colorado GREAT, individuals can effectively remove appreciating assets from their taxable estate while still receiving steady income. It is essential to consult with an experienced estate planning attorney and financial advisor to determine the most appropriate GREAT strategy based on individual circumstances and goals.
Colorado Grantor Retained Annuity Trust
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Grantor retained annuity trusts (GRAT) are estate planning instruments in which a grantor locks assets in a trust from which they earn annual income. Upon expiry, the beneficiary receives the assets with minimal or no gift tax liability. GRATS are used by wealthy individuals to minimize tax liabilities.
A GRAT may be an ideal vehicle for the transfer of significant appreciation on an asset. Assume the client owns an interest in a business that may go public in the near future. If the client transfers the business interest to a short-term zeroed-out GRAT, most of the appreciation will be transferred tax free.
If the grantor dies during the GRAT term, the value of the remainder interest in the trust is included in the grantor's taxable estate under either section 2036 (retained income, possession, or enjoyment of property) or 2039 (retained right to receive annuity in transferred property).
Pros. There are a number of benefits to setting up a GRAT. For one, the annuities can provide a steady stream of income for those who may need it in retirement. However, the main benefit of establishing a GRAT is the potential to transfer large amounts of money to a beneficiary while paying little-to-no gift tax.
How Are GRATs Taxed? GRATs are taxed in two ways: Any income you earn from the appreciation of your assets in the trust is subject to regular income tax, and any remaining funds/assets that transfer to a beneficiary are subject to gift taxes.
At the end of the initial term retained by the Grantor, if the Grantor is still living, the remainder beneficiaries (or a trust to be administered for the benefit of the remainder beneficiaries) receive $100,0000 plus all capital growth (which is the amount over and above the net income that was paid to the Grantor).
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.
GRATs are irrevocable trusts that last for a specific period of time of at least two years. The term you choose depends on your goals and expectations for asset growth potential, but we typically recommend a term between two and five years.
The annuity amount is paid to the grantor during the term of the GRAT, and any property remaining in the trust at the end of the GRAT term passes to the beneficiaries with no further gift tax consequences.
With respect to income taxes, the grantor is treated as the owner of the assets during the GRAT term and reports all income earned by the GRAT on his individual income tax return. To avoid having to file its own fiduciary income tax return, the GRAT should not apply for a separate taxpayer identification number.