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One trust that can make sense for some high-asset estate planners

It’s called a grantor retained annuity trust. Candidly, it’s not an estate planning tool with universal applicability.

Could it make sense for you, though?

We reference GRATs on our website at the long-established Bay Area Law Offices of Connie Yi. We stress therein that the decision to establish such a trust – or any other of the many types of trusts available – “requires careful planning to determinate what is right for your circumstances.”

One indicator that a GRAT might be a vehicle worth pursuing is the amount of wealth that a planning individual or couple possesses. A grantor retained annuity trust can make great sense in cases where substantial assets are targeted for receipt by a future generation.

The basics of a GRAT work as follows.

First, a grantor places assets into an irrevocable trust for a stated time period. Those assets will hopefully grow over time. The IRS requires that an annuity payment be periodically paid by the grantor. Ultimately, trust proceeds will go to beneficiaries without tax consequences.

The key to whether a GRAT will be beneficial in a given instance hinges on two key factors.

The first is whether trust investments will rise materially in value during the trust term. A recent Forbes article suggests that they might well do so for newly created GRATS, given the beating that market holdings have taken during the COVID-19 pandemic. Historically, stocks have risen dramatically following bear market lows. That they will do so again is not guaranteed, of course, but many pundits predict an eventual price climb.

The second point relates to the IRS determination of the grantor’s annuity payment during the trust term. Pundits point out that the current rate is “incredibly low” and might reasonably be expected to stay that way. That means more money remains in the trust and will eventually be released tax-free to beneficiaries.

A GRAT is not something every planner should consider. As Forbes notes, though, a grantor retained annuity trust with a relatively short time frame might now be a tool well worth considering for some estate planners.

A proven estate planning attorney with deep experience in trust creation and administration can provide further information.

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