Gift-Giving Strategies: Grantor Retained Annuity Trusts

A Grantor Retained Annuity Trust, referred to as the catchy “GRAT,” is a fairly low-risk option for those looking to transfer funds. Utilizing a GRAT to avoid taxation on gifts may prove an interesting solution to your gift-giving dilemmas. Ask a knowledgeable Massachusetts tax planning attorney about how a GRAT might figure into your own taxation.

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How the GRAT works

A GRAT can function as a dependable trust for anyone looking to protect their gift-giving practices. Your Massachusetts tax planning attorney can help you set up such a trust and protect you from making any errors involving regulation violations. Rules surrounding the GRAT are strict and the consequences for violating them can be serious.

As a trust, the GRAT receives transferred assets that are then subjected to a retained annuity. IRS Code 7250, referred to as the 7520 rate, establishes the monthly interest rate at which the assets will appreciate. The GRAT will utilize the 7250 rate established at the time of its formation. In order to have some appreciation left over at the end of a GRAT’s two-year term, the assets must appreciate faster than the 7250 rate. If they don’t, there’s no harm done: the assets are merely returned to the grantor, and the trustee is only out the legal fees.

The gift-giving element

At the end of the two-year period, a grantor can transfer any leftover appreciation to family with few tax consequences. If the grantor dies, the GRAT is considered incomplete, but aside from that possibility there is little risk involved. Even if the GRAT results in the exact same value of initial assets, this is merely called a “zeroed out GRAT,” and it just means there won’t be any gift-giving.

Rules and regulations are set to change in the years to come, so get in touch with a qualified Massachusetts tax planning attorney to discuss your needs and learn more about current GRAT regulations. Contact Ionson Law at 781-674-2562 to schedule a consultation.

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