Estate Planning Tools: What Is a GRIT?
A Grantor Retained Income Trust (GRIT) is an estate planning tool designed to reduce the tax implications associated with transferring wealth to beneficiaries. It is particularly useful for high-net-worth individuals seeking to minimize gift and estate taxes. To help you decide if a GRIT fits into your estate plan, the Indianapolis attorneys at Frank & Kraft discuss the mechanics of GRITs, their benefits, potential drawbacks, and practical applications.
What Is a GRIT?
A Grantor Retained Income Trust is a type of irrevocable trust where the Grantor (the creator of the trust) transfers assets into the trust while retaining the right to receive income from the trust for a specified period. At the end of this period, the remaining assets are transferred to the beneficiaries, often children or other family members. The key feature of a GRIT is the retained interest of the Grantor. This retained interest reduces the present value of the gift for tax purposes, potentially lowering the gift tax liability. The Internal Revenue Service (IRS) requires that the value of the retained income interest be subtracted from the value of the transferred property to determine the taxable gift amount.
How Does a GRIT Work?
To create a GRIT, the Grantor establishes the GRIT and transfers assets into it. These assets can include cash, stocks, real estate, or other valuable property. The Grantor retains the right to receive income from the trust for a predetermined term, typically a number of years. This income can be in the form of interest, dividends, rent, or other income generated by the trust assets. After the specified term ends, the remaining trust assets are transferred to the designated beneficiaries. The value of the taxable gift is calculated by subtracting the present value of the retained income interest from the total value of the transferred property. The longer the trust term and the higher the income retained, the lower the taxable gift amount.
What Are the Estate Planning Benefits of a GRIT?
By reducing the taxable value of the gift, GRITs can result in significant tax savings. This is especially beneficial for individuals with large estates who are subject to federal estate taxes. The Grantor retains income from the trust assets during the term, providing a stream of income which can be beneficial for retirement or other financial needs. In addition, if the trust assets appreciate in value, the appreciation passes to the beneficiaries without additional gift or estate tax, effectively increasing the transfer of wealth. Finally, assets transferred into a GRIT are removed from the Grantor’s estate, which can help reduce estate tax liability upon the Grantor’s death.
What Are Some Potential Drawbacks of Creating a GRIT?
Once a GRIT is established, it cannot be altered or revoked. The Grantor must be certain about the decision to transfer assets and the chosen term of the trust. While the grantor retains income, they lose control over the principal assets transferred into the trust. One of the biggest potential drawbacks to creating a GRIT is the knowledge that if the Grantor dies before the end of the trust term, the remaining trust assets revert to the estate and may be subject to estate tax, negating some of the intended tax benefits. Establishing a GRIT also involves some legal and administrative costs, and the ongoing management of the trust requires careful planning and professional advice.
How Does a GRIT Work in Practice?
High-value real estate properties, such as family homes or vacation properties, are often placed into GRITs. The Grantor can continue to use the property and collect rental income, if applicable, during the trust term. GRITs can also be used to transfer ownership interests in family businesses while the Grantor retains income from the business operations. Stocks, bonds, and other investment assets that generate income can also be placed into a GRIT to take advantage of potential appreciation and income retention and GRITs can be an effective tool for legacy planning, allowing Grantors to pass on wealth to their heirs in a tax-efficient manner while retaining income to support their lifestyle.
Do You Have Additional Questions about How a GRIT Works in Estate Planning?
For more information, please join us for an upcoming FREE seminar. If you have additional questions or concerns about estate planning and GRITs, contact an experienced Indianapolis estate planning attorney at Frank & Kraft by calling (317) 684-1100 to schedule an appointment.
Paul Kraft is Co-Founder and the senior Principal of Frank & Kraft, one of the leading law firms in Indiana in the area of estate planning as well as business and tax planning.Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.Read More! Latest posts by Paul A. Kraft, Estate Planning Attorney (see all)
