Cary Stamp, Forbes Best-In-State wealth advisor, presents a sophisticated estate planning strategy that produces income for the grantor while tax-efficiently turbocharging gifts to children and other family members. It’s called the Grantor Retained Annuity Trust (GRAT).
VIDEO TRANSCRIPT:
I’m Cary Stamp, I’m a Certified Financial Planner and an Accredited Estate Planner with Cary Stamp and Company in Tequesta, Florida. Today, I’m going to talk about a subject that can help you turbocharge gifts that you’re making to your children through your estate. That topic is called a Grantor Retained Annuity Trust or what we in the industry typically referred to as a GRAT.
A GRAT is for people that have substantial estates. Usually, these are folks that have estates that are in excess of 10 or $20 million, and they want to make gifts during their lifetime, they can take assets outside of their estate. So therefore, wealthy families, or they might be for someone who has a business that’s growing very quickly and they want to get some of the assets out of their estate or out of their personal business assets into a trust that can benefit their children or future generations. That’s who’s typically going to use this type of a trust.
What is it? Well, we know it’s a trust, so we know that we need some type of legal counsel to help us establish a Grantor Retained Annuity Trust. We know that it’s granted by the individual who’s making the gift. So in a trust, the grantor is the person who is establishing the trust and making a gift. What does retained annuity mean? Retained annuity means that the person who’s making the gift says that I’m going to give away this asset, but I want to keep a little bit of income from this asset over the course of a period of years, or over the course of a lifetime. In most cases, this is just a short period of years. It might be five years, it might be 10 years or 15 years that the graduate retains an annuity.
Now, why do they do that, or what’s the benefit of this type of a trust?
Well, the primary reason why you might want to do this is because the gift that you’re making right now could go up in value in future years and you are freezing the value of that gift at what it is today. So if you give your company’s stock away right now and put it into a GRAT and it’s worth $10 million and you have a 10 year GRAT where you are taking back income from this particular trust, and at the end of those 10 years, that company’s stock is worth $50 million, you’ve transferred all $50 million outside of your estate without paying any federal estate taxes and if we’ve done this properly, you probably haven’t even paid any federal gift taxes to get all of those assets outside of your estate. You’ve received a benefit of getting some income.
So if you want to have a secure stream of income for some period of time, this is one way to do it. It’s not the ideal way to get income, but it does pay income back to the grantor. The main reason why families would use a GRAT is because they have a substantial amount of assets, they want to freeze the value of them and they want to get them outside of their estate without having to pay any gift tax.
Why don’t you have to pay gift tax? That’s a common question that we get. And the reason is because this retained annuity has a value and when you give these assets away, it’s really split into two categories: the retained annuity part and the principal part that’s going to be passed to the next generation or whoever the beneficiaries happen to be of the Grantor Retained Annuity Trust.
The retained annuity part is calculated based on a federal interest rate, the government gives us the terms that we can do this under. If our investment returns on the investment part of this portfolio exceed the federal interest rate, we get a huge benefit over a long period of time. So the retained annuity means that there is no gift because you’re giving something away, but you’re keeping something in return. So very little or no gift taxes on most GRATs.
Lastly, some things to be thinking about before you enter into this type of an arrangement with your children or with your family. Number one, you’ve got to pay lawyers to set this thing up. I don’t set up GRATs, you definitely need very strong, very competent legal counsel. Secondly, it’s an irrevocable gift. You’re giving these assets away, even though you’re retaining an interest in them. And lastly, there could be future legislation that impacts any type of estate planning technique that you always need to be thinking about as you’re entering into something that is irrevocable. I’m Cary Stamp, I’m talking about GRATs today, and this has been a Principled Wealth Moment.
