Maine Grantor Retained Annuity Trust
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How to fill out Grantor Retained Annuity Trust?
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FAQ
Grantor Retained Income Trust, Definition A grantor retained income trust allows the person who creates the trust to transfer assets to it while still being able to receive net income from trust assets. The grantor maintains this right for a fixed number of years.
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.
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.
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.
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.
A GRAT is an irrevocable trust that allows the trust's creator known as the grantor to direct certain assets into a temporary trust and freeze its value, removing additional appreciation from the grantor's estate and giving it to heirs with minimal estate or gift tax liability.
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.
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.