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Grantor Retained Annuity Trusts


Financial planners often tell clients that setting up an irrevocable trust will give them peace of mind, but the fact that irrevocable trusts are irrevocable makes them scary.  Therefore, if people want to set up a trust that will begin to function as an independent entity while the grantor is still alive, they usually choose revocable trusts, but these trusts do not convey all of the same benefits that you can get from an irrevocable trust.  Therefore, most people set up their irrevocable trusts as testamentary trusts, so that by the time the trust begins acting in the way that the trust instrument has programmed it to behave, the grantor is no longer around to see the monster that they have created.  What if you could create an irrevocable trust that promised not to last forever, one that would automatically self-destruct once it had done its job, even if it still had money in it.  To find out more about grantor retained annuity trusts (GRATs), the irrevocable trust with less finality than most, contact a Dade City estate planning lawyer.

How Do GRATs Work?

Grantor retained annuity trusts (GRATs) are irrevocable trusts where the trust instrument specifies that the trust automatically dissolves after a certain number of years.  When the trust dissolves, the principal pays out to the grantor.  If the grantor dies before the predetermined period of time has expired, the remainder beneficiaries indicated in the trust instrument receive the principal.

The IRS assumes that the assets that people will place in GRATs have a yield of two to four percent, and it taxes them according to this assumption.  If you fund your trust with an asset with a yield higher than four percent, you can benefit from the interest than you otherwise would on the same interest-bearing asset if it were not in the trust.

Avoiding Penalties With Your GRAT

If it were that easy to avoid paying taxes just by placing assets in a GRAT, everyone would do it.  The Internal Revenue Code gives the IRS plenty of opportunities to charge penalties on GRATs if you do not follow the rules to the letter.  These are some common scenarios where the IRS charges penalties on GRATs:

  • The grantor does not fund the trust soon enough after establishing it
  • You fund the trust with an additional contribution after the initial one listed in the trust instrument
  • The annual withdrawals you take out are more than the amount indicated in the trust instrument

If Flexibility Is Your Number One Priority, Choose a Revocable Trust Instead

GRATs can help you save money on taxes, but they are not the best of all possible worlds.  If your primary goal is to keep assets out of probate while retaining the freedom to modify your estate plan, a revocable trust is the best option.

Contact a Florida Estate Planning Attorney About Keeping Assets Out of Probate

An estate planning attorney can help you make wise decisions about establishing a revocable or irrevocable trust.  Contact The Law Office of Laurie R. Chane in Dade City, Florida to discuss your estate plan.



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