In the field of estate planning the acronym GRAT stands for a grantor retained annuity trust. If you create such a trust in the right economic climate it could result in an eventual transfer of assets to the beneficiary without any gift or estate tax exposure.
Those who have assets in excess of the estate tax exclusion amount must indeed look for ways to pass along these resources in a tax efficient manner. Right now the exclusion is $5.25 million, and if you have assets that exceed this amount you may want to consider conveying resources into a GRAT.
The estate planning strategy that is employed here is that of “zeroing out” the grantor retained annuity trust. With these trusts you take annuity payments over the term, and to zero it out you arrange for these payments to equal the entirety of the taxable value of the trust.
The IRS accounts for the anticipated interest through the utilization of the Section 7520 rate that was in place at the time the trust was created. At the time of this writing in July of 2013 this rate stands at 1.4%.
You may question why you would want to bother creating a trust that was designed to leave the beneficiary with nothing. This is not the ultimate objective with the zeroed out GRAT.
If the trust ultimately outperform the IRS estimate of interest accrual there will be something left in the GRAT after the expiration of the term. The beneficiary would inherit this remainder, and this transfer would take place in a tax-free manner.
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