Benefits of Gift Giving

Many of our hard-working clients want to pass on their wealth to family members. Nonetheless, individuals with a high net worth must consider potential gift and estate tax implications when gift giving. By creating a thorough estate plan, we can effectively tackle these worries. These trusts can help distribute assets in a tax-efficient manner.

Grantor Retained Annuity Trust

A Grantor Retained Annuity Trust (GRAT) reduces gift tax by allowing the grantor to transfer assets into the trust while retaining the right to receive annuity payments for a set period. The taxable gift is calculated based on the difference between the value of the assets transferred and the present value of the annuity payments. If the computed gift value is minimized (or even zeroed out), the potential gift tax liability is reduced. This strategy is effective because IRS interest rates used in the calculation are often lower than actual market rates, allowing for the transfer of asset appreciation to beneficiaries without incurring significant gift tax.

Grantor Retained Unitrust

A Grantor Retained Unitrust (GRUT) is a non-revocable trust similar to a GRAT. It involves transferring assets and property into the trust while maintaining the right to receive an annuity over a specified duration. When the trust reaches its designated end, any remaining assets and property are distributed to the beneficiary named.

With a GRUT, the annuity payments each year are calculated based on a fixed percentage of the trust’s value. Therefore, since the trust’s value can vary from year to year, the annuity amount can differ even though the calculation percentage is the same. Since the annuity is based on the trust value that year, it is unlikely that the difference between what’s given and retained will be zero, requiring some gift tax.

Qualified Personal Residence Trust

A qualified personal residence trust (QPRT) is an irrevocable trust offering a means to exclude a residence from the total estate. The trust takes ownership of the residence. However, the grantor may use the property for a designated duration. Subsequently, when this timeframe concludes, the residence is passed on to the beneficiary. If the grantor wants to continue to use the property, they must pay rent.

This transfer reduces the estate tax at the grantor’s death. Nevertheless, gift tax will be due when the property is conveyed to the beneficiary. A grantor may only create a QPRT for two properties. Importantly, if the property carries a mortgage, settling it before transferring ownership to the QPRT might be prudent. Paying off the mortgage can help prevent complexities in managing the trust.

The grantor must survive the trust term for all three of these trusts. Therefore, factoring in the grantor’s present age and anticipated lifespan is crucial when deciding on the trust’s duration. In the case of the grantor’s passing before the trust terminates, the tax benefits will be undone.

Law Stein Anderson Can Help

We realize setting up the best trust for your particular needs and gift giving situation is highly individual. The expert attorneys at Law Stein Anderson can help you evaluate gift tax, estate tax, and nontax considerations before deciding. We’re here to develop the best strategy that ensures your well-earned assets are passed on to your loved ones. Contact us today to schedule your free consultation.