Advanced Estate Planning

What is a Grantor Retained Unitrust?

You want the best for your children.  You want to make sure that they have everything they need for the future.  The way to accomplish that is through fashioning an effective estate plan that maximizes the amount of assets left for your family when you pass, and minimizes the time and expense that comes with unwinding an estate.

If you have significant assets, like stocks and bonds, and want to both receive some income from those investments during your lifetime while still making sure that your children eventually get the assets, then a Grantor Retained Unitrust might just be the answer.

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 is part of your plan when appropriate. To learn more, call us at 561-656-0200.

Today’s blog is a primer on the basics of a GRUT.  It might just be the right tax-saving vehicle for you.

What is a Grantor Retained Unitrust?

A grantor retained unitrust (abbreviated as GRUT) is a type of irrevocable non-charitable trust.  The trust, during its term, makes payments to the donor of the trust, also called the grantor, that are equal to a fixed percentage of the trust’s value once a year.  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.

The key element of a GRUT 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.  Accordingly, a GRUT is a great way in which a grantor can transfer assets to his or her heirs while saving them tax expense.

How Does It Work in Real Life?

Consider the example where you have $2 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 $8 million at the end of ten years.  Depending on the size of your estate and the applicable tax rate at the time of your death, that increase in value could mean significant federal estate tax liability on that money.

Accordingly, you would like to avoid as much estate and gift taxes as possible on that additional money.  You could consider giving the assets to your kids now to avoid the estate and gift taxes, yet you still want to use a little of the income for yourself while you are still alive.

That is where a GRUT, or even a grantor retained annuity trust (GRAT), comes in handy.  Here is what you would do:

You would transfer the $2 million to an irrevocable trust to last for a certain period of time, like 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 of a GRUT or GRAT.  After the ten years are up, the assets in the trust pass to your beneficiaries.

How Do You Receive an Annual Income?

The choice of whether you create a grantor retained unitrust or grantor retained annuity trust will dictate the way in which you define your retained income interest.

For a GRUT, the interest on the income can be a fixed percentage of the value of the trust, re-calibrated each year. That interest is the unitrust interest income. The amount of interest can grow over time as the value of the trust grows. Taking more interest out of the trust each year, however, may work against your goal of transferring the most money to your beneficiaries at the lowest tax cost.

In that event, you may want to use a grantor retained annuity trust (GRAT) instead.  With a GRAT, the income from the trust to you annually is a fixed dollar amount or a fixed percentage of the initial value of the trust (rather than being a percentage of the trust’s value that changes as the trust grows over time).

Why Are There Tax Benefits to the Beneficiaries from a GRUT?

The tax benefit from creating a GRUT 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, you can’t normally take it back.  So, you have, for tax purposes, parted with the money when you create 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 for everyone, and you should be sure to consult an estate planning attorney to understand whether you are someone who could benefit from creating a GRUT.  Here are some potential downsides to a GRUT:

1. Loss of control.  Once you create the GRUT, you lose control over the trust’s assets, including how to invest the assets.

2. 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.

3. 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.

4. Maybe not for grandkids.  GRUTS and GRATS 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.  Doane & Doane are the top West Palm Beach estate planning attorneys.