King Washington Termination of Grantor Retained Annuity Trust in Favor of Existing Life Insurance Trust
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FAQ
When the grantor of a grantor trust dies, the trust generally becomes irrevocable. This shift often triggers the distribution of assets according to the terms specified in the trust agreement. Additionally, the death of the grantor can initiate the King Washington Termination of Grantor Retained Annuity Trust in Favor of Existing Life Insurance Trust, allowing for an efficient transfer of wealth to beneficiaries.
The annuity payments cannot, however, be made in advance of the payment date. For that reason, it is important to consider the cash flow constraints on the grantor when deciding which assets will be used to fund the GRAT.
The transfer of assets to a GRAT is a transfer to a trust and not to a grandchild. The generation-skipping transfer occurs when the grantor's interest in the GRAT terminates. Thus, GST exemption must be applied when the GRAT terminates and the ability to leverage the client's GST exemption is lost.
A grantor retained annuity trust (GRAT) is a financial instrument used in estate planning to minimize taxes on large financial gifts to family members. Under these plans, an irrevocable trust is created for a certain term or period of time.
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.
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.
And, with a GRAT or GRUT, you receive an income, instead of continuing to live in your home, for a set number of years. When you set up a GRAT or GRUT, you transfer an income-producing asset (like a family business, stocks or real estate) into an irrevocable trust for a set number of years.
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.
out GRAT allows the grantor to transfer any appreciation in excess of the Sec. 7520 rate without using any of the grantor's lifetime exemption. If the assets fail to appreciate at the Sec. 7520 rate, the only cost to the grantor will have been the legal and administrative costs of setting up the GRAT.
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.