How Does a Grantor Retained Annuity Trust (GRAT) Work?

A grantor retained annuity trust is a tool that many people use in estate planning. Here are the basics of what a grantor retained annuity trust is.

Grantor Retained Annuity Trust

A grantor retained annuity trust is a vehicle used to convey a large amount of money to someone without having to pay gift taxes on the donation. This technique is often used by wealthy individuals who wish to pass on their wealth to a beneficiary without incurring extra taxes.

How It Works

With this type of trust, the individual with the money sets up the entity and makes a donation to it. The trust is set up to be an annuity. The donor will then receive a regular annuity payment from the trust for a certain amount of time. After the annuity payments stop, the money from the trust can then be given to a beneficiary.

In order to qualify for this type of program, the beneficiary of the trust has to be a family member. If the donor passes away before the annuity payments are complete, the money will automatically go to the beneficiary who was chosen when the grantor retained annuity trust was created.

What are the requirements for a grantor retained annuity trust?

If you are setting up a grantor retained annuity trust, you will have to make sure that certain requirements are fulfilled. One of the main requirements, obvious from the name, is to set up the trust as an annuity. This means that the grantor will receive annuity payments for a certain number of years after the trust is set up. After a certain amount of time, the annuity payments will cease. Then, the remainder of the trust has to be passed onto a beneficiary whom you designate. Another requirement is that the beneficiary has to be a family member of the grantor.

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