What Is a Grantor Retained Annuity Trust, or GRAT, in Missouri?

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If you’re a confident investor, you know what it’s like to have an unexplainable feeling about an asset’s potential for appreciation. Being right, however, is a double-edged sword: You reap the benefits of your finely attuned intuition, but you’re also heavily taxed for it.

In times like these, it can feel like you’re being punished for your financial skills. You risked a lot investing in that start-up, and instead of being able to transfer assets freely, you’re now faced with the threat of an exorbitant gift tax. You may be wondering if there’s a way around this penalty, or if you’ll have to just bear it. 

Luckily, there’s an estate planning tool outlined in the internal revenue code that may be able to help you avoid excessive taxation. It’s called a grantor retained annuity trust (GRAT), and it offers several tremendous benefits for people who have assets that they believe will appreciate greatly. However, GRATs aren’t for everyone.

At the Law Office of David S. Schleiffarth, we believe that every client deserves a customized estate plan to meet their specific needs. If you’re curious about whether a GRAT is right for you, we can help you explore your options.

In the meantime, keep reading to learn everything you need to know about grantor retained annuity trusts, how they work, who they’re for and more.

Do you need help making the most out of a great opportunity? As top GRAT lawyers in St. Louis, we can suggest the best tools to achieve your financial goals. Getting started is as easy as calling (314) 448-0527 to set up an initial case evaluation.

A grantor retained annuity trust (GRAT) is a special estate planning tool for reducing tax burden on large financial gifts to family members. It is a type of irrevocable trust in which a grantor locks their assets for a certain period of time and then receives a yearly payment.

At the end of the GRAT, the beneficiary can receive its assets with minimal or even no gift tax liability. A gift tax, according to the Internal Revenue Service, is a federal tax levied against someone who gives anything of substantial value—like cash or real estate—without getting something substantial in return.

If you have an asset you believe will go up in value, such as a startup or an interest in a venture fund, you could put that asset into a GRAT and retain the right to get the annuity back over the term of the trust. Essentially, you’d be able to get your “gift” back and transfer the appreciation to someone else without using any federal estate exemptions.

Suppose you had a million-dollar asset that you believed would shoot up in value over the next five years. You could put that asset into a GRAT and set the term as five years. Each year, on the anniversary of your gift, the GRAT would pay you $200,000. At the end of the five-year term, you’d have earned your gift back, plus some interest.

Now, suppose that the asset you put into your GRAT appreciated greatly. Because you got your initial gift back, the IRS says that the remaining appreciation doesn’t require a gift tax. As a result, you’re able to transfer that appreciation to your loved one without paying an exorbitant tax fee. 

In general, a grantor retained annuity trust benefits wealthy investors. This type of trust is especially beneficial to people who’ve used all of their federal estate and gift exemptions and may be subjected to a 40% gift tax on assets they wished to transfer.

Before deciding whether or not a grantor retained annuity trust is right for you, it’s important to understand it doesn’t always work out as intended.

In addition to offering substantial benefits, a GRAT also comes with significant risks. For example, if the creator of the trust dies before the trust expires, its assets become part of their taxable estate. The beneficiary receives nothing, meaning the GRAT ultimately served no purpose.

It’s also important to understand that in order for a GRAT to work as intended, its assets must actually appreciate in value. Assets that depreciate in value also defeat the purpose of having a GRAT in the first place.

GRATs are just one of many estate planning tools, and they are among the most complicated. If this is your first time considering a GRAT, you probably have many questions. The best thing you can do is consult an experienced Missouri estate planning attorney about your options. In the meantime, check out our answers to some of the most frequently asked questions about GRATs.

• What is the GRAT term?

The term of the GRAT is the specified number of years in which the grantor receives annuity payments based on the IRS rate at the time the GRAT is funded, as well as the fair market value of the assets used to fund the GRAT.

• What type of assets should I put in a GRAT?

The best types of trust assets to use in a GRAT are those with a relatively low valuation in comparison to what you believe they are worth and could appreciate to be worth. These could include stocks, interest in a family business or startup, bonds, royalties or any asset with a high appreciation potential.

• Do I need to have a high net worth in order to use a GRAT?

Not necessarily. People in various financial situations can use a GRAT, but it’s most commonly used for tax purposes, specifically for high-net-worth individuals who want to reduce their federal estate tax liability. 

• Are there other types of trusts that might work for me?

An estate planning attorney can help you explore numerous types of trusts, from revocable trusts (or living trusts) and generation-skipping trusts to special needs trusts and charitable trusts. The best tools for you will depend on your unique financial situation, desires and goals. 

When you’re ready to make an estate plan, you have numerous options insofar as planning tools. Although GRATs can offer massive benefits under specific circumstances, they may not be the best type of trust for you. However, rest assured that there is an ideal set of estate planning tools for you, and we can help you find them. 

At the Law Office of David S. Schleiffarth, we’re devoted to using our expertise to serve the St. Louis community. No matter how large or modest your estate, we want to help you protect your financial future. If you’re ready to make a comprehensive plan for asset protection and growth, contact us online to schedule a consultation, or give us a call at (314) 448-0527 today.