Estate Planning For Dummies
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Grantor-retained trusts let you create a “noncharitable” trust. Instead of the property in the trust eventually going to a charitable organization, the property goes to (for example) your child or your favorite cousin. There are three types of Grantor-retained trusts:

  • GRAT — a grantor retained annuity trust: This trust that pays you a fixed amount of money at regular intervals. In general financial lingo, an annuity typically refers to a fixed amount of money, and a GRAT pays you an annuity from the trust.

  • GRUT — a grantor retained unit trust: This trust that pays you a specified percentage of the trust. So with a GRUT instead of a GRAT, your payments likely vary from one year to another, depending on the property’s value in the trust, which is affected by any earnings (or losses).

  • GRIT — a grantor retained income trust: This trust that allows you to transfer ownership of certain assets but retain the income or use of that property during the trust. This is useful if you want to place your family home in trust and still keep living there. Part of the income applicable to the trust is your right to live in that house.

Grantor-retained trusts are irrevocable, so think and plan carefully before putting one in place.

To be extremely precise, placing your house in trust and continuing to live in it is actually a qualified personal residence trust, which is a specific form of a GRIT that’s still permitted under current tax law. Other older GRIT varieties no longer are permitted, but estate planners often use GRIT and qualified personal residence trust interchangeably, even though the latter is technically only one form of a GRIT.

With all three types of grantor-retained trusts, after the trust goes away, the property in the trust transfers to the beneficiary. Again, instead of a charity (as with a charitable trust), that beneficiary often is a relative.

The tax laws for all the varieties of grantor-retained trusts are extremely complicated! For example, you and your beneficiaries may need to worry about gift taxes and estate taxes. At the same time, you may realize some tax savings depending on factors, such as the value of the property you place in trust and changes in that property’s value.

Not only do you need to work with your attorney when deciding if a grantor-retained trust is for you (and if so, what type), but also make sure you work with your accountant to clearly understand all the tax consequences — for you and also for your beneficiary.

About This Article

This article is from the book:

About the book authors:

N. Brian Caverly, Esq., is an attorney-at-law emphasizing estate planning and elder law. Jordan S. Simon is Vice President of Asset Management at Venture West, a Tucson-based investment firm.

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