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Grantor Retained Annuity Trusts (GRATs) represent an opportunity to transfer appreciating assets to the next generation with little to no gift or estate tax consequences.
With a zeroed-out GRAT, since the grantor retains an annuity equal to what they contribute to the GRAT, the value of the remainder interest (the amount left over after the GRAT term) is zero. This is what the grantor gives to the beneficiaries. Since this is a zero-value gift from the IRS’s perspective, it doesn’t use any portion of the grantor’s lifetime exemption from federal gift tax.
So, suppose individuals or families own assets that they expect to appreciate, but they don’t necessarily want to gift them outright. In that case, it may make sense to shift the potential future growth of those assets to heirs using a GRAT. Also, GRATs tend to be particularly effective in low-interest-rate environments.
The financial downside to a GRAT is often limited to the transaction costs of creating it (e.g., legal, accounting and, if funding it with illiquid assets, appraisal fees). Speak with your tax professional to learn if a GRAT makes sense for your financial situation.
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