Thinking about retirement and providing for your family after you have passed away can be daunting. For one, let’s be honest, it is not the most exciting, uplifting, joyous subject on which to spend any length of time. Planning for life after our demise is the classic definition of what we call, in slang terms, a “really bummer.” Second, it seems so incredibly complex. There are financial instruments for everything under the sun, and they all have names that make little to no sense. One such term is the grantor retained unitrust.
If someone asked you to define what that term meant, you would be probably tongue-tied just trying to repeat the term – unless, of course, you were experienced in trusts and estates matters. So, if you have assets that you would like to pass down to your family but do not know the best way how to think about talking to a professional. Indeed, before getting too confused about terms like grantor retained unitrust, or putting off your estate planning entirely, get an experienced person involved. Get someone who knows both the law and rules surrounding more esoteric financial instruments, and who also knows your specific estate needs.
The trusts and estates professionals at Doane & Doane are just the answer for you. Here at Doane & Doane, the premier estate planning attorneys in Palm Beach, we specialize in advanced estate planning for our clients. We can make sure that a tax-saving grantor retained unitrust as part of your plan when appropriate. To learn more, call us at 561-656-0200.
Now, we are devoting this blog to the grantor retained unitrust because it is not as complicated as it sounds. In fact, if you break down that title into its component parts, you can easily understand what it is. We will also discuss here, how a grantor retained unitrust works.
The Grantor Retained Unitrust – Let’s Break it Down
A grantor retained unitrust (often abbreviated as “GRUT”) is a certain kind of trust that is not earmarked for charity and is irrevocable. It is designed for those people who want to be able to
1. Enjoy a portion of the money they put in the trust while alive, but
2. Want the remainder to go their children at death,
3. All in a single trust.
In fact, knowing that information, you can see why the instrument is called a “grantor retained unitrust.” It is “grantor retained” because the grantor (the person who puts money into the trust) can retain a portion of the trust while they are still alive. Specifically, the trust will make payments to the grantor of the trust that is equal to a fixed percentage of the trust’s value once a year.
Further, it is a “unitrust” because a single trust can both provide money to the grantor during his or her life, and also provide the assets to children at the grantor’s death. In particular, at the termination of the trust, the remaining assets in the trust pass to the trust’s beneficiaries as determined by the grantor. Normally, the beneficiaries would include the grantor’s children.
Why Would You Want a Grantor Retained Unitrust? Tax Benefits
The key element of a grantor retained unitrust is that, because of the way it is set up, there is no transfer tax assessed at the time the trust terminates and distributes to the beneficiaries.
Therefore, a GRUT is a great way in which a grantor can transfer assets to his or her heirs while saving them tax expense.
For example, say you have $1 million in securities that you want to leave to your children. Over the next decade, there is a good chance that the securities will substantially increase in value, possibly being worth $4 million at the end of ten years. That increase in value could mean significant federal estate tax liability for you depending on the size of your estate and the applicable tax rate at the time you pass away.
You want to avoid as much estate and gift taxes as possible on that additional money. Of course, you could give the assets to your kids now to avoid the estate and gift taxes. But, let’s say that you still want to use a portion of the income for yourself while you are still alive.
That is where a GRUT comes in handy. You could transfer the $1 million to an irrevocable trust to last for a certain period of time, say ten years. Over those ten years, you as the grantor receive (or “retain”) an annual income from the trust – that is the “grantor retained” part. After the ten years are up the assets in the trust pass to your beneficiaries tax-free.
How do the Beneficiaries Obtain a Tax Break?
The tax benefit comes because the moment you create the trust is the same moment that a taxable gift has been made to your beneficiaries. Why? Because the trust is irrevocable, which means you cannot generally take it back. So, you have, for tax purposes, given the money in the trust away when you created the GRUT.
Moreover, the taxable value of the gift is reduced to reflect the value of the income interest retained by the grantor. The longer the duration of the trust, the higher the retained income interest, and thus the lower the taxable value of the gift.
Are There Downsides to a GRUT?
A GRUT is not always the best option. Here are some potential downsides:
1. Taxes for the Grantor. Because you created the trust to save taxes for your beneficiaries, all of the income from the trust is taxable to you, the grantor. The purpose of the trust, then, is less about income and more about having the asset appreciate.
2. Better for younger donors. If you pass before the trust term is over, then the full value of the assets in the trust are part of your taxable estate. Thus, a GRUT is better for someone younger with a longer life expectancy.
3. Loss of control. Once you create the GRUT, you lose control over the trust’s assets, including how to invest the assets.
4. Maybe not for grandkids. GRUTS are not as helpful with transfer tax when skipping generations. So, they are less useful if you wish to have your grandchildren be beneficiaries of the assets.
In sum, GRUTS are great tax-saving tools to reduce the tax burden on your family. They can be an effective part of an overall estate plan, but careful drafting is needed to make sure that the trust is not included in the grantor’s estate.
That is where the professionals at Doane & Doane are so vital. We are expert estate planning attorneys who can fashion a comprehensive estate plan that suits your needs and the needs of your family. Call us for a free consultation at 561-656-0200.