What is a grantor retained annuity trust?
A. A grantor retained annuity trust (GRAT) is a trust which transfers tax-free all of the trust’s asset appreciation which exceeds a specified interest rate (prescribed by the U. S. Treasury Department) to one’s children (or other beneficiaries). The person contributing the assets to the trust is called the “grantor.” The grantor transfers property to the GRAT. Typically, the GRAT periodically pays a set amount (the “annuity”) back to the grantor. You pick the trust’s duration, you pick the annuity amount, and you pick the property to go into the trust. At the end of this term, the GRAT property remains in trust for the benefit of, or passes directly to, your children or others named in the trust instrument. If the grantor dies during the period when the trust pays an annuity to the grantor, the trust property will likely be included in the grantor’s taxable estate for estate tax purposes. In other words, this tax planning technique does not work if the grantor dies during the trust’s
