My article last week covered a type of trust that can be used to help reduce estate taxes, the Grantor-Retained Annuity Trust (GRAT). This article will focus on Grantor-Retained Unitrusts (GRUT) and the benefits of both GRATs and GRUTs for reducing estate taxes.  

If you missed last week’s article, a GRAT allows a senior to gift property while receiving a stated dollar amount each month, quarterly, or annually (an annuity).  The payments to the senior must be made for life or for a term of years.  The value of the gifted property is frozen at the time of the gift and any taxes issues are addressed by using the lifetime gift tax exclusion.  

If the senior does not want to receive a fixed dollar amount, the senior can choose to receive a fixed percentage of the trust’s assets. This percentage will be based on the value of the trust assets each year and can be paid to the senior on a monthly basis, quarterly basis, or annually.  The payments will continue for life or for a term of years.  

With both a GRAT and a GRUT, the “magic” in these trusts is achieved by the senior placing appreciating property in the trust. For example, John places his lakefront vacation home in a GRAT.  He retains an annuity of $12,000 annually (this is the net rental value) for a term of ten years. The location of the home is a rural, relatively undeveloped place at the time he places the property in the GRAT.  The value of the home is valued at $200,000.    The value of the gift is determined by subtracting the value of the annuity (John’s right to payments) from the total value of the property. If, according to taxation tables, the value of John’s annuity is $81,000, then he has made a gift of $119,000.00.  This is the amount that would be reported for gift tax purposes instead of the full $200,000.00.  

During the term of John’s ten years, the area begins to grow and become a highly desirable area for lakefront homes. The property is now valued at $600,000.00.  John lives through the ten year term and the property is given to his children per the requirements of the trust.  John has now effectively gifted property worth $600,000 to his children while only being responsible for $119,000.00 for gift/estate tax purposes. If there is a danger that his estate may pay estate taxes, the reduction in the value of his estate by using the trust strategy may eliminate or greatly reduce any taxes that must be paid.   

It is important for a senior to realize that the objective of these trusts is to reduce estate taxes.  These trusts may not be appropriate or desirable for every person. As with any estate planning, this type of trust should be discussed with an attorney to determine if the trust works with the senior’soverall goals.  

Editor’s Note: Melanie B. Bradford is an attorney located in Scottsboro, Alabama at 803 Garland Ferry Road at the intersection of Veterans Drive and Garland Ferry near The Daily Sentinel. Her phone number is 256-259-3301. The Alabama State Bar requires any communication that may be interpreted as an ad to state: “No representation is made about the quality of legal services to be performed is greater than the quality of legal services performed by other lawyers.”

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