Creating a GRIT (grantor retained income trust) could have some benefits, particularly if you’re seeking ways to minimize taxes in your estate plan. A GRIT is a type of irrevocable trust. This means that the transfer of assets is permanent and can’t be reversed.
Yahoo Finance’s recent article titled “What Is a Grantor Retained Income Trust (GRIT)?” explains that a grantor retained income trust lets the person who creates the trust transfer assets to it, while still being able to receive net income from trust assets. The grantor keeps this right for a set number of years.
With a GRIT, the grantor (or creator of the trust) has the right to receive net income from the assets held in the trust. The trustee distributes income to the grantor according to the trust terms. After the initial term during which the grantor is eligible to receive income from the trust expires, one of two things can happen. The remaining assets in the trust can be distributed to its beneficiaries. If you don’t want the assets to pass on to beneficiaries immediately, you can set it up so the assets continue to be held in trust.
However, unlike other types of trusts, there are rules on who can get a transfer of GRIT assets. Specifically, there are certain people who can’t be named as a beneficiary to a GRIT, including your spouse, your parents or spouse’s parents, your children or spouse’s children, or your siblings or spouse’s siblings (or their spouses). Nevertheless, you can designate the children of your siblings or other distant relatives as the beneficiaries of a GRIT.
A GRIT is typically used for one specific purpose, which is to minimize taxes in estate planning. Keeping estate taxes as low as possible results in additional assets to pass on to your beneficiaries when you pass away.
When assets are transferred to a GRIT, they’re valued at a discount. This is based upon the number of years for which you plan to draw income from the trust as the grantor, and the principal value of assets included in the trust are excluded from your estate for estate and gift tax purposes. However, you’ll be taxed on the income you receive from a GRIT during the initial term. It’s taxed at your ordinary-income tax rate. It’s important to know that for the purpose of minimizing estate taxes, you must outlive the initial term. If you die during the period when you’re still receiving income from the trust assets, no estate or gift tax benefit would pass on to your beneficiaries.
GRITs can serve a specialized objective as part of your estate plan. However, whether you need one can depend on a variety of factors, so speak with an experienced estate planning attorney about the specifics of a GRIT.
Reference: Yahoo Finance (Oct. 23, 2020) “What Is a Grantor Retained Income Trust (GRIT)?”