A benefit of working hard is sharing the fruits of your labor with your loved ones. However, gift or estate tax consequences may impact high net worth clients when they share their wealth. By crafting a comprehensive estate plan, we can address these concerns and protect high net worth clients and their loved ones. The following three types of trusts may assist high net worth clients in sharing their wealth in a tax-advantageous way.
Grantor Retained Annuity Trust
A grantor retained annuity trust (GRAT) is an irrevocable trust you can use to make large financial gifts to your loved ones while also minimizing gift tax liability. These financial gifts remove future appreciation from your estate, reducing the amount that will be subject to estate tax at your death. However, there may be gift tax liability, which would be owed and paid at the trust’s creation. You create a GRAT and then fund it with accounts and property, such as those that are expected to appreciate in value over the GRAT’s term. Then, you receive a fixed annuity payment, based on the trust’s original value, for a specified time period. Once the period has terminated, the remainder of the trust’s accounts and property are transferred to your named beneficiary.
Grantor Retained Unitrust
A grantor retained unitrust (GRUT) is an irrevocable trust that is like a GRAT. Accounts and property are transferred to the trust and you retain a right to receive an annuity for a fixed time period. Then, at the trust’s termination, the trust’s remaining accounts and property are given to your named beneficiary. However, with a GRUT, the annuity payment that you receive each year is calculated based upon a fixed percentage of the trust’s value that year. Therefore, since the trust’s value can vary from year to year, the annuity amount can vary even though the same percentage is used each year to calculate the annuity.
Like a GRAT, the gift tax is due at the time the accounts and property are transferred to the trust, and the gift tax liability is based on using the subtraction method. Because the annuity is based on the trust value that year, it is unlikely that the difference between what you give and retain will be zero, which will require that some gift tax be paid.
The important thing to note with the two types of trusts is that you must survive the trust term. When trying to determine the length of the trust, it is important to consider your current age and life expectancy. If you die before the trust terminates, the tax benefits will be undone and the full value of the account or property will be counted towards your estate tax liability.
Because each transaction is subject to taxation, it is important that you evaluate the gift tax, estate tax, and nontax considerations before making a decision. We are available to meet with you, discuss your unique situation, and craft a plan that leaves your hard-earned wealth to those you care about as you wish.