First a few preliminaries on the Grantor Retained Annuity Trust or GRAT.
What is a GRAT? GRAT stand for Grantor Retained Annuity Trust. It is a special trust where you can make a gift and get the original amount back over a period of years and the growth of the asset remains in the trust – usually, for children.
Why do people do GRATs? GRATs are often used in times of low interest rates, and low asset values to move substantial growth in an undervalued stock, family business, or even real estate, out to the next generation.
Can you give an example? Yes. Mrs Walton (Sam Walton’s wife) contributed a substantial amount of Walmart stock to a GRAt for her children. The trust had to pay her back the stock (or cash) plus interest over a peiod of years. However, because her stock rose so much in value, even when she was paid back, a great deal of wealth remained in the trust for her heirs. She paid no gift tax becasue the GRAT was structured, so that at the time of the transfer, there was no gift.
Should I get my GRAT done before the end of the year? Well, a GRAt is an irrevocable trust. So, you should thoroughly and completely understand the GRAT before you sign and fund it. However, in the current economic environment, a GRAT can be a very powerful estate planning tool.
GRAts are complicated to set up but once you go through the process, they are fairly easy to use and to administer and the payoff to your heirs can be huge.
Since you must out live the term of the GRAt for it to work it’s magic, careful consideration should be given to how fast the GRAT should pay you back. But, once you know that the GRAt is for you, the sooner you fund it the better.
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