On January 19, 2023 in Estate Planning by Leighton Tyau

Wealth Management: Grantor Retained Income Trusts (GRITs)

GRITs in wealth management

GRITs, also known as Grantor Retained Income Trusts (GRITs), are a type of estate planning tool used to transfer assets to a trust while still retaining the right to receive income from those assets. This can be an attractive option for individuals who want to transfer wealth to their heirs but also want to continue receiving income from their assets during their lifetime.

What Is a GRIT?

A GRIT (Grantor Retained Income Trust) is a type of irrevocable trust that is established through a written agreement. In this trust, the grantor (the creator of the trust) transfers assets to the GRIT and retains the right to receive all of the net income from the trust assets for a specific period of time, known as the initial term. The trustee of the GRIT distributes the net income to the grantor on an annual or more frequent basis, as specified in the trust agreement. At the end of the initial term, the remaining trust principal is either transferred to the beneficiaries outright or held in further trust for their benefit. If the grantor survives the initial term of the GRIT, the principal of the trust is not included in the grantor’s estate for federal estate tax purposes.

How Does a GRIT Trust Help with Tax Avoidance?

One of the main benefits of setting up a GRIT (Grantor Retained Income Trust) is that the assets transferred from the grantor to the trust are valued at a discount for federal gift tax purposes. The size of the discount depends on the length of the initial term of the trust and the applicable federal rate in effect when the trust is established. In addition, any further growth of the assets are not includible in the grantor’s estate.

Who Can be GRIT Trust Beneficiaries?

In a GRIT (Grantor Retained Income Trust), there are certain individuals who cannot be named as beneficiaries according to Section 2702 of the Internal Revenue Code. These excluded beneficiaries include the grantor’s spouse, ancestors, descendants, siblings, and the spouses of these individuals. However, it is possible to name more distant relatives, such as nieces and nephews, or even friends as beneficiaries of a GRIT.

How a GRIT Trust Works in Practice

A GRIT trust works by transferring ownership of assets to a trust, with the grantor retaining the right to receive a fixed income from those assets for a specified period of time. This period of time is known as the “retained income period” and can range from a few years to the remainder of the grantor’s life. At the end of the retained income period, the assets and any remaining income from those assets will be transferred to the designated beneficiary.

The grantor is also typically the trustee of the GRIT, which means they have control over the trust assets and the income they generate. This allows the grantor to continue to manage the assets and make investment decisions while also transferring ownership to the designated beneficiary.

Disadvantages of Using a GRIT

While there are several benefits to using a GRIT trust, there are also a few potential disadvantages to consider. One disadvantage is the inflexibility of a GRIT trust, as it is irrevocable and cannot be modified or terminated by the grantor once it is established. In addition, GRIT trusts can be complex and may require the help of a professional, such as an attorney, to set up and manage. Finally, a GRIT trust has tax implications for the grantor or the designated beneficiary, and it is important to carefully consider these implications before establishing a trust.

How Is a GRIT Different from Other Trusts?

A GRIT (Grantor Retained Income Trust) is a type of trust that is established with assets that are valued at a discount. This discount is based on the length of the initial term of the trust and the federal rate in effect when the trust is established. When assets are transferred into a GRIT, it is considered a gift equal to the value of the assets minus the present value of the income interest retained by the grantor (the person creating the trust) for the initial term. If the grantor survives the initial term, the assets in the trust will be passed on to the designated remainder beneficiaries at a reduced gift tax value.

For example, if a grantor establishes a 15-year GRIT and transfers $100,000 of assets into the trust, the grantor will receive the income from the trust for the initial term. Let’s say the applicable federal rate at the time the assets were transferred was five percent. The present value of the retained income interest would be $66,007, so the gift upon creating the GRIT would be $33,993. However, if the grantor survives until the end of the initial term, the remainder beneficiaries would receive $100,000 plus any capital growth.

Who Should Consider a Grantor Retained Income Trust?

A GRIT, or Grantor Retained Income Trust, may be worth considering if you are looking to minimize taxes in your estate plan and provide ongoing income for yourself or other designated beneficiaries. However, it is important to keep in mind that a GRIT is a complex financial tool with specific requirements and potential drawbacks. Therefore, it may not be the right choice for everyone.

Before deciding if a GRIT is right for you, it is important to consider a number of factors, including your other estate planning strategies, the types of assets that are best suited for a GRIT, who you want to name as beneficiaries of the trust, and your likelihood of outliving the initial term. It is also important to keep in mind that GRIT trusts are irrevocable, meaning that once you transfer assets to the trust, you cannot change the terms of the trust. Therefore, it is crucial to be certain about the transfer of assets and confident in your ability to outlive the initial term.

If you are considering setting up a GRIT, it is highly recommended to speak with an estate planning attorney or financial advisor to determine if it is the right choice for you. They can help you weigh the pros and potential cons of including a GRIT in your estate plan and suggest alternative options, such as a grantor retained annuity trust or GRAT, if necessary. A GRAT is similar to a GRIT in that it is also irrevocable and can be used to pass on assets to beneficiaries tax-free. However, it allows the grantor to make financial gifts to family members while potentially reaping significant estate tax savings and gift tax savings.

Do I Need to hire an attorney for a GRIT trust?

It is nearly impossible to properly set up and manage a GRIT trust without the guidance of an attorney. GRIT trusts involve complex legal and tax issues that require a thorough understanding of trust law and estate planning. An attorney will help to ensure that the trust is set up correctly and that all necessary legal documents are properly executed. In addition, an attorney can provide guidance on the potential tax implications of a GRIT trust and help to ensure that the trust meets the grantor’s estate planning needs. As such, it is strongly recommended to hire an attorney when setting up a GRIT trust to ensure that the trust is properly established and managed.

In conclusion, GRITs can be a useful tool for individuals who want to transfer wealth to their heirs while still retaining the ability to receive income from their assets. However, it’s important to carefully consider the potential drawbacks and seek the guidance of an attorney to determine whether a GRIT is the right choice for your estate plan. If you’re considering setting up a GRIT and would like more information, don’t hesitate to contact us. We would be happy to help you determine whether a GRIT is the right choice for your estate planning needs.

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