If you want to transfer assets to your loved ones in Connecticut without paying any estate or gift taxes, then you should consider a Grantor Retained Annuity Trust (GRAT). Here’s an overview of how GRATs work, why you should consider them, and some caveats.
What is GRAT?
Grantor Retained Annuity Trusts is a special kind of irrevocable trust. Here you will put an asset that you want to gift to your beneficiaries in a temporary trust, freezing its value, earning annuities for the set period, and giving it to your heirs without paying gift or estate taxes.
Think of it this way, you have an asset worth $100,000 in a trust, and it is known to appreciate in value over time. If, at the end of the year, the value of that asset grows to $110,000, the extra $10,000 will be yours to earn, and this will continue until the time set for the freeze period is done. Any leftovers, including the growth of those assets, will be passed down to your heirs without significant tax liabilities.
How GRAT works
The person that owns the property and creates GRAT in their estate planning process is known as a Grantor. The grantor will receive annuities for the asset they have in GRAT for a specified term of years. This annuity received will be based on the IRS Section 7520 interest rate.
The current Section 7520 interest rate is at 1.2%. So if your property earns an interest greater than 1.2%, you will get your annuities, and at the end of the term, your beneficiaries will get the asset. However, if the trust earns 1.2% or less, you will get back the entire trust property after the set period, and nothing will be passed on to your heirs. It’ll be like you didn’t create the trust in the first place.
Many people are embracing GRATs because it is the simplest way to transfer property to your heirs without gift and estate tax liabilities. Besides, this trust still generates cash flow to you in the form of an annuity, and at the end of the term, your heirs can enjoy it too.