Health Insurance Online
Phone Icon
Call now to speak with a Licensed agent (866) 954-1892

Insurance Type:

Taking Care of Mom and Dad: GRATs

The grantor retained annuity trust is an irrevocable trust, good for shifting some of the value of an asset out of the estate. The grantor places assets in trust for the ultimate benefit of the children (i.e., they have a remainder interest), but retains the right to an annual payout for a period of years.

By accepting some gift tax liability at the time the GRAT was set up, your parents reduce their estate tax liability later and the heirs end up with more. If your parents die within the term of the trust, all property is included in the estate, and there are no tax consequences -- just as if nothing had been done.

The key to the GRAT technique (and the CRUT) is the relative values given the two interests involved: The gift of the remainder interest in the trust principal, and the value of what your parents have retained -- the right to collect a certain cash payout from the trust each year for X years.

There is a financial calculation that depends on the current interest rate published by the IRS, the number of years during which your parents will take the trust payout and the amount of the payout.

The greater the annual payout and the number of years of payments, the greater the value your parents have retained for themselves -- and the smaller the value the IRS gives to what is left over.

Google Plus One