Grantor Retained Annuity Trust

A Grantor Retained Annuity Trust (commonly referred to by the acronym GRAT) , is a financial instrument commonly used in the United States to make large financial gifts to family members without paying a U.S. gift tax. [ [http://www.trustsandestates.net/GRATs/GRATMmClIce.htm Ice, Noel, “What You Should Know About Your GRAT (Grantor Retained Annuity Trust) How To Make LARGE Gifts Without Paying Gift Tax or Using Any Gift Tax Unified Credit”, 2003] ]

Basic Mechanism

A donor sets up a GRAT by making a donation into a trust. The trust is set up as an annuity whereby the donor receives an annual payment from the annuity for a fixed period of time (the term). At the end of the term, any remaining value in the trust is passed on to a beneficiary of the trust as a gift. The beneficiary must be a family member of the donor. If the donor dies before the end of the term, then the value of the trust at that time is passed on to the beneficiary.

The United States Internal Revenue Service has a number of regulations governing how the remaining value of the trust at the end of the term (or at the death of the donor) is taxed. When the GRAT is first set up, a “gift value” of the GRAT is calculated. The gift value is set equal to the initial contribution to the GRAT plus a theoretical interest earned on the principal minus the annuity payments that would be made through the end of the term. The theoretical rate of interest is determined by IRS regulations [Treas. Reg. §25.2702-3(b) and (d)] . The rate is set equal to 120% of the federal mid-term rate during the month that the GRAT is established.

To realize a tax benefit, the sum of the scheduled annuity payments of a GRAT are set to be about equal to the principal plus theoretical interest. Thus, for tax purposes, the initially calculated gift value is zero, since what will be paid back to the donor in annuity payments is anticipated to be about equal to what the donor invested, plus interest. If a GRAT is funded with highly volatile assets, however, it is possible that the actual interest earned on the assets will be substantially higher than the IRS theoretical interest. Thus at the end of the term, the value remaining in the GRAT may still be large, even though the initial IRS calculation suggests that it should have been zero. This remaining value is then passed on to the beneficiary without incurring a gift tax.

Important Legal Cases

*Audrey J. Walton v. Commissioner, 115 T.C. 589 (2000), acq. Notice 2003-72, 2003-44 IRB, 10/15/2003. [ [http://www.ustaxcourt.gov/InOpHistoric/walton.TC.WPD.pdf Audrey J. Walton v. Commissioner, 115 T.C. 589 (2000)] ] This case established the current way that the IRS established a gift value for a GRAT.

Patents

The Wealth Transfer Group owns a patent covering different methods for managing SOGRATs. A SOGRAT is a GRAT that is at least partially funded with stock options. The patent is number is US patent|6567790, and is entitled "Establishing and managing grantor retained annuity trusts funded by nonqualified stock options".

ee also

*Trust law
*SOGRAT

References


Wikimedia Foundation. 2010.

Look at other dictionaries:

  • grantor-retained annuity trust — See: grantor retained trust Category: Wills, Trusts & Estates → Estate Tax Category: Wills, Trusts & Estates → Living Trusts & Avoiding Probate Nolo’s Plain English Law Dictionary. Gerald N. Hill, Kathleen Thompson Hill. 2009 …   Law dictionary

  • Grantor Retained Annuity Trust - GRAT — An estate planning technique that minimizes the tax liability existing when intergenerational transfers of estate assets occur. Under these plans, an irrevocable trust is created for a certain term or period of time. The individual establishing… …   Investment dictionary

  • grantor-retained trust — An irrevocable trust designed to save on estate tax. There are several kinds; with all of them, you keep income from trust property, or use of that property, for a period of years. When the trust ends, the property goes to the final beneficiaries …   Law dictionary

  • Trust — may refer to:* Trust (social sciences), a relationship of reliance. ** Trust Fall, a trust building game.In law: * Trust law, where money or property is owned and managed on behalf of another * Escrow, where a thing is held in trust until… …   Wikipedia

  • trust — n 1 a: a fiduciary relationship in which one party holds legal title to another s property for the benefit of a party who holds equitable title to the property b: an entity resulting from the establishment of such a relationship see also… …   Law dictionary

  • trust — A legal entity created by a grantor for the benefit of designated beneficiaries under the laws of the state and the valid trust instrument. The trustee holds a fiduciary responsibility to manage the trust s corpus assets and income for the… …   Black's law dictionary

  • United States trust law — Introduction Most law regulating the creation and administration of trusts in the United States is now statutory at the state level. In August 2004, the National Conference of Commissioners on Uniform State Laws created the first attempt to… …   Wikipedia

  • Qualified personal residence trust — The following article on personal residence trusts and qualified personal residence trusts is taken from attorney Jacob Stein s treatise on tax planning, with his permission. Residence trusts are used to transfer a grantor’s residence out of the… …   Wikipedia

  • SOGRAT — SOGRAT® is registered trademark of the Wealth Transfer Group [ [http://tess2.uspto.gov/bin/showfield?f=doc state=gcuspg.2.1 SOGRAT trademark registration at the USPTO] ] . It is an acronym for Stock Option Grantor Retained Annuity Trust. It is a… …   Wikipedia

  • Номинальный доход — Доход регулярное денежное пополнение бюджета экономического субъекта. Расходы, Затраты, Издержки уменьшение экономических выгод в результате выбытия денежных средств, иного имущества; Доход > Расход = Прибыль,Профицит,Сальдо положительное… …   Википедия

Share the article and excerpts

Direct link
Do a right-click on the link above
and select “Copy Link”

We are using cookies for the best presentation of our site. Continuing to use this site, you agree with this.