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A wealth transfer or legacy care planning strategy may include strategies that preserve assets while providing financial benefits to those who inherit them. One such strategy is the grantor-retained income trust (GRIT).
GRITs offer a unique opportunity for individuals to retain an income stream from tax-advantaged assets before passing the assets on to beneficiaries. In this article, we will look at grantor-retained income trusts and their benefits and potential drawbacks.
What is a GRIT?
A grantor-retained income trust is a legacy care planning tool that allows an individual, or grantor, to transfer assets to a trust while retaining an income interest for a specified period. During this timeframe, the grantor continues to receive income from the assets held in the trust. At the end of the trust term, the remaining assets pass to the designated beneficiaries.
Benefits of GRITs
One of the primary benefits of a GRIT is its ability to minimize estate taxes. By transferring assets to the trust, the grantor effectively removes the assets from their estate for tax purposes. This can lead to significant tax savings by reducing the estate’s taxable value. Additionally, the appreciation of the assets in the trust during the trust term is also removed from the grantor’s estate, further reducing potential estate tax liabilities.
Another advantage of a GRIT is the ability to transfer wealth to beneficiaries at a potentially lower gift tax cost. The value of the gift is determined using actuarial calculations that consider the term of the trust, the income stream retained by the grantor, and the applicable interest rates. If the value of the income interest is high relative to the total value of the assets transferred, the taxable gift may be reduced.
GRITs also offer flexibility in terms of income distribution. The grantor can structure the trust to provide a fixed income stream or a percentage of the trust assets. This allows the grantor to tailor the income payments to their specific needs and financial goals. For individuals who rely on income from their assets, a GRIT can be a valuable tool to ensure a steady income stream while still achieving wealth transfer objectives.
Potential Drawbacks of GRITs
Though GRITs have some enticing benefits, there are potential drawbacks to keep in mind. First, the grantor relinquishes ownership and control of the assets transferred to the trust. Though the grantor retains an income interest, the assets are no longer under their direct control. Therefore, it’s crucial to carefully consider the trust terms and their effect on the grantor’s financial security and lifestyle.
Additionally, if the grantor passes away before the trust term expires, the assets held in the GRIT will be included in their estate for estate tax purposes. This means that the anticipated tax benefits of the GRIT may be diminished if the grantor doesn’t survive the trust term. Proper legacy care planning and consideration of the grantor’s health and life expectancy are vital when establishing a GRIT.
Another important consideration is that a GRIT’s beneficiaries can’t be the grantor’s close relatives. This includes the grantor’s spouse and children. This feature of GRITs works well for someone who wants the trust’s assets to go to nonrelatives or charities.
Consult a Professional
A GRIT can offer you a way to have an income stream from assets placed in the trust while saving money in taxes and passing the assets on to designated beneficiaries. However, there are some limitations. Consult an experienced estate planning attorney and your financial advisor to find out if a GRIT will help you achieve your estate planning goals.
This article offers a summary of aspects of estate planning. It is not legal advice. It does not create an attorney-client relationship. For legal advice, you should contact an attorney.
Contact our Auburn office at 260-925-3738 today to learn more about your legacy care and financial planning options. We will help you achieve your estate planning goals and establish a meaningful legacy.