A grantor retained annuity trust, or “GRAT,” is an estate planning technique to reduce estate and gift taxes, especially on closely-held business interests or other property that produces income or is expected to increase in value. The estate planning attorneys of Shatz, Schwartz and Fentin can help you determine if a GRAT is appropriate. Please see Revocable and Irrevocable Living Trusts for more about the basics of trusts.

The older family member irrevocably transfers assets into a GRAT, retaining a right to income for a fixed term (for example, ten years). At the end of the term, the property passes to the children. The value of the asset is frozen at the time of the initial gift, and after the term expires, no longer is taxed in the parent’s estate. If the parent dies before the term ends, the value of the assets is not reduced and no savings are achieved.

Although GRATs are specifically allowed by the IRS, they are subject to special rules, and the beneficiaries must be family members. As with other types of trusts, use of a GRAT is one method of avoiding probate.

We normally recommend that GRATs be used in conjunction with other estate planning techniques. If you are considering a GRAT, we can help you decide the length of the term and which assets would achieve the greatest tax savings. Please call us if you are interested in learning more about GRATs or other estate planning strategies.