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Home > Definitions & Designations > What is a Grantor Retained Income Trust (“GRIT”)?

What is a Grantor Retained Income Trust (“GRIT”)?

Estate Planners | Monday, April 18th, 2011

A grantor retained income trust, which is also known by the acronym of GRIT, is a frequently used trust that can help to reduce the amount of estate tax that is due when a person passes away with a large estate. The Grantor retained income trust can also provide an income stream for the creator of the trust that provides a steady flow of money during their lifetimes while allowing their heirs to benefit from their wealth upon the trust creator’s death. Thus, the reason for the name, grantor retained income trust. This trust allows you to effectively give away the property that you want to give away upon death while not quite giving it away immediately so that you can retain income from the trust yourself during your lifetime. There are some advantages and disadvantages to establishing a grantor retained income trust that you should be aware of. Let’s look at how the Grantor retained income trust works.

The GRIT trust, or grantor retained income trust is an estate planning tool that is often used by those who are looking to reduce both gift and estate tax. The Grantor retained income trust is a type of irrevocable trust that is put into place via a written trust agreement where the creator of the trust (who is the grantor) makes transfers of assets to the trust while retaining his or her right to receive all of the income that is generated by the trust assets for a period of time called the initial term. The net income from the trust is distributed to the grantor by the trustee of the trust each year or even more frequently, per the terms of the trust instrument. When the trust expires, the remainder of the principal within the trust is can be distributed to the beneficiaries that are chosen by the grantor, such as the grantor’s nieces of nephews (the beneficiaries cannot be lineally descended from the grantor or the spouse of the grantor), or it can be held in a trust for the beneficiaries’ benefit, depending on the grantor’s wishes. If the grantor is still living when the trust expires, the grantor retained income trust’s principle is excluded from the estate of the grantor for the purpose of federal estate taxation.

As a real world example, imagine that you want to leave behind $1 million dollars to two different beneficiaries when you pass away. To leave this total of $2 million dollars, you will need to leave over $4.4 million in order to cover the estate tax that would be due off the top. Thus, $4.4 million left behind yields just $2 million dollars to your heirs. A well structured Grantor retained income trust could mean the difference in paying $2.4 million in estate tax to just $1.4 million, roughly.

Advantages and Disadvantages to the Grantor retained income trust

The biggest advantage when establishing a Grantor retained income trust is that the assets that are transferred to the trust from the grantor are valued at a discount for federal gift taxation. The amount of the discount depends on the length of the initial term of the trust and the applicable federal rate that governs the truth during the month that the trust was created. The biggest disadvantage to the Grantor retained income trust is that children and grandchildren cannot be beneficiaries for the trust’s remaining assets when the term of the trust ends.

To find out if a Grantor retained income trust is the right type of trust for your estate, consult with a local estate planner who can explain the intricacies of this trust and help you make a more informed determination of which trust best suits your individual financial needs and objectives. Another disadvantage of the Grantor retained income trust is that it is irrevocable and once it is created, the terms cannot be changed.

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