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What are grantor retained annuity trusts?

On Behalf of | Jun 26, 2022 | Estate Planning |

Funding a trust in Connecticut can be a complex process. There are a number of challenges that you will need to overcome. Your purpose may be to move the appreciation of the asset from the grantor to your beneficiaries. This will be to reduce the value of your assets in order to catch a break on estate taxes.

The primary components of a GRAT

Modern estate planning can take many forms. One of them may be a grantor retained annuity trust (GRAT). This is an arrangement that consists of two main components.

The first will be a term of years during which you receive an annuity payment based on the IRS rate for the month you founded it. This rate will also be based on the market value of the assets that you used to fund it.

The second will be based on the remainder term. This is the period of time after the end of your GRAT term. The idea here is to safely cover the time while the property is still being held in trust.

Factors contributing to the popularity of GRAT

It will be up to you to choose the right kind of trust to fit the needs of your situation. A GRAT is a very popular type of trust because it allows you to pass on the natural appreciation of your assets to your family members.

As long as the appreciation exceeds the IRS hurdle rate, you can transfer this excess value without worrying about gift tax. Keep in mind that the hurdle rate is subject to alteration on a monthly basis. The lower the rate is at a particular point, the lower the level of appreciation you will need to qualify to pass it.

There are not many potential cons associated with a GRAT. You will incur some fairly routine costs during the time that you are setting it up. These should be weighed against the number of benefits that will be conferred once the trust is up and running. These are pros that will benefit both you and your heirs.