Differences between GRAT, GRIT, and GRUT Trusts
The Internal Revenue Code defines a “grantor trust” as a trust where the person who created the trust is the owner of its assets and property for estate tax and income tax purposes. Essentially, the grantor has control and can direct the trust’s assets and income. The use of certain kinds of trusts can help reduce the taxable gift to the trust’s beneficiaries. Popular options include the grantor retained interest trust (GRIT), the grantor retained annuity trust (GRAT), and the grantor retained unitrust (GRUT).
Grantor Retained Interest Trust (GRIT)
The grantor retained interest trust is often called the “house GRIT.” This is an irrevocable trust where the grantor places their personal home into the trust, but they retain the right to its income or use of the property for a certain amount of time. The length of the trust’s term determines the retained income interest. The longer the specified term is, the greater the retained income interest, which lowers the taxable gift to the beneficiaries at the end.
If the grantor continues living in the home at the end of the trust, there should be a written lease agreement that requires the grantor to pay rent that is a fair market value.
Grantor Retained Annuity Trust (GRAT)
With a grantor retained annuity trust, the grantor creates an irrevocable trust for a certain amount of time. The person setting up the trust will pay a tax when it’s established. Assets are then transferred into the trust, and each year, the trust pays out an annuity. Once the trust period ends, the beneficiaries will receive the assets tax free. The annuity payments are derived either from interest earned on the assets in the trust or as a percentage of the total value of the assets. In the event the grantor dies before the trust ends, it will become part of the individual’s taxable estate and therefore the beneficiaries receive nothing.
Grantor Retained Unitrust (GRUT)
A grantor retained unitrust is an irrevocable trust used to transfer assets to the owner’s children. The grantor keeps the right to receive funds on an annual basis from the trust using a fixed percentage that is calculated each year based on the trust’s new value. The grantor will transfer property into the trust and receive a “variable annuity” payment where the income stream will vary each year based on the value.
Grantors are allowed to make additional gifts to the trust beyond the initial one. When the GRUT ends, the remainder of the assets are transferred to the named beneficiaries tax free. In the event the grantor does not live through the trust’s term, all the property is returned to the grantor’s estate.
Retaining a Florida Estate Planning Attorney
If you have questions on these types of trusts or any other estate planning tools, it’s important to speak with a knowledgeable West Palm Beach estate planning attorney. At the Law Offices of Larry E. Bray, P.A., we have been assisting clients with all their estate planning needs for over 30 years. Contact our office today at 561-571-8970 to schedule a consultation.