Indiana Grantor Retained Annuity Trust
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How to fill out Grantor Retained Annuity Trust?
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FAQ
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.
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.
By removing the growth from your estate, you can reduce the overall size of your estate and hopefully avoid or lessen estate taxes in the future. GRATs work best when interest rates are low, which lowers the IRS Section 7520 hurdle rate.
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).
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.
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 is an irrevocable trust, and when you transfer property to the GRAT, you are making a taxable gift to your beneficiaries.
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.
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.
In other words, during the initial term of the GRAT (the term that the Grantor is to receive the annuity payments) the Grantor will be taxed on all of the income earned by the GRAT during each such year, including capital gains.