An Oregon Granter Retained Annuity Trust, commonly known as ORGAN, is a legal and financial instrument designed to assist individuals in minimizing estate taxes and transferring wealth to their heirs. It is an irrevocable trust established during the granter's lifetime, wherein the granter transfers assets to the trust while retaining the right to receive annual fixed annuity payments for a specified period. The ORGAN offers several benefits, such as reducing estate tax liability, preserving assets for future generations, and potential income tax advantages. The granter's retained annuity payment is determined at the trust's creation and is usually set at a level that returns the initial investment over the trust's term. By retaining this annuity, the granter removes the assets from their estate, potentially reducing estate taxes upon their passing. There are two primary types of Oregon Granter Retained Annuity Trusts — thGranteror Retained Annuity Trust (GREAT) and the Delaware Incomplete Non-Grantor Trust (DING). The GREAT is the more widely used option and allows the granter to receive fixed annuity payments throughout the trust term, after which any remaining assets pass to the designated beneficiaries free of estate taxes. The DING, on the other hand, is specifically formulated to minimize income tax on investments, making it a popular choice for high net worth individuals. Additionally, there are variations of the traditional ORGAN, such as the Net Income with Makeup Charitable Remainder Unit rust (TIMEOUT), which allows for charitable donations as beneficiaries, potentially providing income tax deductions. Another variant is the Flip Unit rust, which grants the granter the flexibility to switch from an annuity payment to a unit rust payment during the trust term, allowing fluctuations based on the trust's performance. In conclusion, an Oregon Granter Retained Annuity Trust (ORGAN) is a powerful estate planning tool that provides individuals with the ability to transfer assets while retaining an income stream. This irrevocable trust offers significant estate tax advantages and various types or variations, including GREAT, DING, TIMEOUT, and Flip Unit rust, catering to different objectives and wealth management goals.
Oregon Grantor Retained Annuity Trust
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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.
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.
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.
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).
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.
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.
A grantor retained interest trust is a trust where a grantor makes an irrevocable transfer of assets but reserves the right to receive income from or enjoyment of those assets for a period of years. When the trust terminates, the assets are passed on to others.
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.
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.
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.