• Skip to main content
  • Skip to primary sidebar
  • Skip to footer
< class="site-title" itemprop="headline">Flood & Masiuk LLC | Southampton Estate Planning Attorneys

Attorneys At Law

  • Home
  • Our Firm
    • About Our Firm
    • About The American Academy
    • Advantages of Working With Our Firm
    • Attorney and Staff Profiles
    • Speaker Connection
  • Estate Planning
    • Asset Protection and Business Planning
    • Estate and Gift Tax Figures
    • Estate Planning
    • Family-Owned Businesses & Farms
    • Incapacity Planning
    • IRA & Retirement Planning
    • Legacy Planning
    • LGBTQ Estate Planning
    • Pet Planning
    • SECURE Act
    • Special Needs Planning Services
    • Trust Administration and Probate
  • Elder Law
    • Are You A Caregiver?
    • Coping With Alzheimer’s
    • Emergency Medicaid & Nursing Home Planning
    • Guardianship & Conservatorship
    • Hospice Care
    • Medicaid Planning
    • Veteran’s Benefits
  • Resources
    • DocuBank
    • Elder Law Resources
      • Elder Law & Medicaid Definitions
      • Elder Law Reports
    • Estate Planning Resources
      • Estate Planning Checkup
      • Estate Planning Definitions
      • Estate Planning Needs Checklist
      • Estate Planning Reports
      • Incapacity Planning Definitions
      • Is Your Estate Plan Outdated?
      • Top 10 Estate and Legacy Planning Techniques
    • Frequently Asked Questions
      • Frequently Asked Questions for Families Without an Estate Plan
      • Legacy Wealth Planning FAQ’s
      • LGBTQ Estate Planning FAQs
      • Trust Administration & Probate FAQs
    • LGBTQ Resources
    • Newsletters
    • Special Needs Resources
    • Trust Administration & Probate Resources
      • Bereavement Resources
      • How to Know if You Need Extra Help With Your Grieving
      • Loss of a Loved One
      • The Mourner’s Bill of Rights
      • Things You Need To Do When a Loved One Passes Away With a Trust
      • Things You Need To Do When a Loved One Passes Away With a Will
      • Trust Administration & Probate Definitions
  • Reviews
    • Our Reviews
    • Review Us
  • Blog
  • Contact Us
Home / General / What Is a Grantor Retained Annuity Trust?

What Is a Grantor Retained Annuity Trust?

May 14, 2015 by Joe Masiuk, Estate Planning Attorney

What Is a Grantor Retained Annuity Trust?A grantor retained annuity trust or GRAT can be a useful estate planning tool if you are exposed to the federal estate tax. Before we explain the value of this type of trust, we should provide some background information about the tax.

Estate Tax Parameters

Every estate is not subject to the estate tax, because there is a credit or exclusion. This is the amount that you can transfer free of the estate tax.

For the rest of the 2014 calendar year, the estate tax exclusion is $5.34 million. Each year the IRS adjusts the exclusion to account for inflation, and they have announced the adjustment for 2015. Next year, the exclusion will be $5.43 million.

We should point out the fact that there is an unlimited marital deduction. You can transfer unlimited assets to your spouse tax-free, so the exclusion would be used to leave tax-free bequests to others.

The top rate of the federal estate tax stands at 40 percent.

In addition to the estate tax, there is also a gift tax, because the tax man doesn’t want you to give gifts while you are living to avoid the estate tax. The two taxes are unified, so the exclusion is a unified exclusion that applies to lifetime gifting along with postmortem asset transfers.

Zeroed Out GRAT

Now that we have provided the necessary background information, we can look at the zeroed out GRAT strategy.

The idea is to fund the trust with highly appreciable assets. When you create the trust, you are called the grantor. As the grantor you take annuity payments throughout the trust term. You also name a beneficiary who would inherit any remainder that may be left in the trust after the term expires.

If there is a remainder, the beneficiary would be receiving a taxable gift. The Internal Revenue Service calculates the value of the gift by adding the hurdle rate to the principal. This accounts for anticipated interest throughout the term of the trust. The hurdle rate is 120 percent of the federal midterm rate.

To zero out the grantor retained annuity trust, you take annuity payments that are equal to the entire taxable value of the trust.

Why would you go through all of this trouble to get all of your own money back? Remember, in the beginning you intentionally funded the trust with assets that you expected to appreciate. The hurdle rate has been relatively low for a number of years. If the assets in the trust outperformed this rate, there will be a remainder left in the trust, even though you took the entire taxable value.

The beneficiary would assume ownership of the remainder free of the gift tax.

Learn More

If you would like to learn more about grantor retained annuity trusts and other estate tax efficiency tools, contact us through this page to set up a free consultation: Bucks County PA Estate Planning Attorneys.

  • Author
  • Recent Posts
Joe Masiuk, Estate Planning Attorney
Joe Masiuk, Estate Planning Attorney
As a partner in the law firm of Flood & Masiuk, LLC, Joseph Masiuk is committed to, a practice which provides people of all ages and walks of life with thoughtful and comprehensive solutions in Estate Planning, which includes Elder Care, Medicaid and Special Needs Planning.
Joe Masiuk, Estate Planning Attorney
Latest posts by Joe Masiuk, Estate Planning Attorney (see all)
  • What Is the Difference Between a General and a Limited Power of Attorney? - May 24, 2015
  • What Is a QDOT Trust? - May 22, 2015
  • Do You Have to Impoverish Yourself to Qualify for Medicaid? - May 19, 2015

Filed Under: General

About Joe Masiuk, Estate Planning Attorney

As a partner in the law firm of Flood & Masiuk, LLC, Joseph Masiuk is committed to, a practice which provides people of all ages and walks of life with thoughtful and comprehensive solutions in Estate Planning, which includes Elder Care, Medicaid and Special Needs Planning.

Primary Sidebar

Blog Subscription

Flood & Masiuk LLC | Southampton Estate Planning Attorneys

112 Lakeside Park
Southampton, PA 18966
Phone: (215) 322-6330
Fax: (215) 322-9199

MAP

map for Flood & Masiuk LLC office

Opening Hours

Monday9:00 AM - 5:00 PM
Tuesday9:00 AM - 5:00 PM
Wednesday9:00 AM - 5:00 PM
Thursday9:00 AM - 5:00 PM
Friday9:00 AM - 5:00 PM

Footer

  • Disclaimer
  • Sitemap
  • Contact Us

© 2023 American Academy of Estate Planning Attorneys, Inc.

All Rights Reserved.
Attorney Advertisement

footer-logo
  • fb
  • twitter
  • linked-In