Pennsylvania Grantor Retained Annuity Trust
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FAQ
Grantor-Retained Unitrust (GRUT) is a form of Grantor-Retained Trust set up by individuals to reduce taxes on an estate. To create a GRUT, a grantor creates an irrevocable trust that is for a limited period of time, paying taxes at the outset of the trust.
Pennsylvania law imposes the income tax on grantor trusts according to the same Pennsylvania personal income tax rules that apply to irrevocable trusts unless the grantor trust is a wholly revocable trust. Grantor trusts other than settlor-revocable trusts are required to file the PA-41 Fiduciary Income Tax Return.
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.
If the income you receive is a set dollar amount and does not fluctuate each year, the trust is a GRAT (grantor retained annuity trust). If the income is a percentage of the trust assets and the amount of income you receive fluctuates each year, the trust is a GRUT (grantor retained unitrust).
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 grantor retained unitrust (abbreviated as GRUT) is a type of irrevocable non-charitable trust. The trust, during its term, makes payments to the donor of the trust, also called the grantor, that are equal to a fixed percentage of the trust's value once a year.
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.
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.
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.
In a GRAT, you receive a fixed amount from year to year (an annuity). In a GRUT, by contrast, you receive an amount equal to a fixed percentage of the trust assets (a unitrust).
