Grantor Retained Trust
A grantor retained trust is one in which the Trustmaker transfers an interest in an asset to a non-charitable beneficiary (usually a child or grandchild) in the future while retaining an interest in the asset for a specified period of time.
A grantor retained trust reduces the estate taxes which the Trustmaker’s estate will have to pay by removing the asset from the Trustmaker’s gross estate if the Trustmaker survives beyond the time period specified in the trust.
A drawback of the grantor retained trust is that the entire value of the asset is used to determine the amount of the gift given instead of the discounted value. This makes a grantor retained trust an ideal vehicle for keeping the benefits of an appreciating asset, such as a business ownership position, for a number of years and then giving that asset to your beneficiaries in the future at the value of the asset at the time the trust was set up. On the other hand, it is usually not advantageous to place a depreciating asset into a grantor retained trust.
Two Types of Trust
The two types of grantor retained trust are the grantor retained annuity trust (GRAT) and the grantor retained unitrust (GRUT).
The GRAT is one in which the Trustmaker retains a right to a fixed payment for a period of years. The GRUT is one in which the Trustmaker retains the right to a payment (usually annually) of a fixed percentage of the value of the trust property.
Grantor retained trusts are primarily for tax purposes and consequently must be drafted and organized with great care.