A Grantor Retained Unitrust (a “GRUT”) is an effective tool for reducing the size of your taxable estate.  When implemented properly, lifetime gifts to a GRUT can help you to get high appreciating property out of your estate and avoid or significantly reduce gift and estate taxes.  GRUTs are similar to GRATs (Grantor Retained Annuity Trusts) in that they both accomplish the same purposes of reducing the taxable estate.  A GRUT, however, is different from a GRAT in that the annuity payments received by the grantor from a GRAT are fixed amounts that are set when the trust is created.  (See article on A Grantor Retained Unitrust (GRUT)). With a GRUT, the annuity payments to the grantor are a fixed percentage of the total trust property.  In both cases, the payments to the grantor must be made at least annually.

When you transfer property to a GRUT, the IRS treats it like a gift insofar as the value of the property transferred to the trust exceeds the grantor’s retained interest in the trust.  In other words, the IRS uses actuarial tables, your stated percentage of annuity payments, the length of the trust, and any other retained interests in the trust to calculate the present value of your retained interest.  If the grantor’s retained interest is equal to or greater than the value of the property transferred to the trust, there are no gift tax consequences to the transfer.  The idea is that you transfer highly appreciating property to the trust so that when the term of the trust ends and the trust property is distributed to the beneficiaries, it will have grown in value but you don’t have to pay estate or gift taxes on that growth.  Another great thing about GRUTs is that the IRS treats a GRUT as a “grantor trust” for income tax purposes.  This means that you, the grantor, are considered the owner of the trust, and therefore you have to pay the trust income taxes.  If your goal is to reduce the size of your estate, this works in your favor because you are effectively making tax free gifts in the form of income tax payments on property that your beneficiaries hold a future interest in.

One downside of GRUTs is that if you die before the term of the GRUT is exhausted, a portion of the trust equal to the amount you would have received had you survived the term of the trust will be included in your estate for estate tax purposes.  This is more forgiving than the all-or-nothing consequences of dying during the annuity term of a GRAT.  Another downside is that if the property doesn’t appreciate as expected, you will not have really transferred much out of your estate.

When properly established and administered, GRUTs can be very helpful to you in meeting your estate planning goals.  Before establishing a GRUT, you should counsel with an experienced estate planning attorney to weigh the costs and benefits of a GRUT and make sure that it is the right choice for your estate planning needs.

For additional reading:

Minimizing Estate Taxes

The Always Dependable Estate Tax

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