Tennessee Termination of Grantor Retained Annuity Trust in Favor of Existing Life Insurance Trust
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FAQ
In other words, if the grantor (or a non-adverse party) has the power to revoke any part of a trust and reclaim the trust assets, then the grantor will be taxed on the trust income.
To implement this strategy, you zero out the grantor retained annuity trust by accepting combined payments that are equal to the entire value of the trust, including the anticipated appreciation. In theory, there would be nothing left for the beneficiary if the trust is really zeroed out.
Unlike many estate planning techniques, the client has significant access to GRAT assets and can substitute assets, change beneficiaries, and otherwise modify the GRAT to suit his or her changing needs. Accordingly, the GRAT is one of the most powerful wealth-shifting tools available for high net worth families.
A grantor retained annuity trust is a type of irrevocable gifting trust that allows a grantor or trustmaker to potentially pass a significant amount of wealth to the next generation with little or no gift tax cost. GRATs are established for a specific number of years.
A grantor trust is considered a disregarded entity for income tax purposes. Therefore, any taxable income or deduction earned by the trust will be taxed on the grantor's tax return.
GRATs may provide payments for a term of years or for the life of the Grantor.
If a trust is a grantor trust, then the grantor is treated as the owner of the assets, the trust is disregarded as a separate tax entity, and all income is taxed to the grantor.
Is an irrevocable life insurance trust (ILIT) a grantor trust? A13. Usually, yes. Most ILITs are grantor trusts since these trust instruments typically provide that income may be applied toward the payment of premiums on policies insuring the grantor's life (or the grantor's spouse's life).
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.
Thus, the trustee cannot terminate the GRAT before expiration of the term of the grantor's qualified interest by distributing to the grantor and the remainder beneficiaries the actuarial value of their term and remainder interests, respectively.