Trusts have many uses in connection with the reduction of a person’s estate tax burden. Some examples are grantor retained annuity trusts (“GRATs”), grantor retained unitrusts (“GRUTs”), qualified personal residence trusts (“QPRTs”) and intentionally defective grantor trusts (“IDGTs”).
In a GRAT, the grantor transfers assets into a trust and, for a term of years, retains the right to receive a fixed sum of money. After the term, the trust terminates and the assets in the trust are transferred typically to the grantor’s children.
In a GRUT, the grantor transfers assets into a trust and, for a term of years, retains the right to receive a fixed percentage of the assets in the trust valued annually. After the term, the trust terminates and the assets in the trust are transferred typically to the grantor’s children.
In a QPRT, a grantor transfers a principal or vacation home into a trust and retains the right to live in the home for a term of years after which it can be transferred to children or continue in trust. The grantor can retain the right to live in the home for life while paying fair market rent.
In each of the GRAT, GRUT and QPRT, the value of the transfer to the grantor’s children is reduced by the value of the retained interest. Moreover, the value of the asset transferred is valued, less the retained interest, at the time of transfer, not as of the grantor’s death. The taxpayer gets a discount and a freeze of the value of the asset.
In an IDGT, the grantor sells an appreciating asset to a grantor trust in exchange for a promissory note. A grantor trust is a trust in which all the taxable income is deemed that of the grantor. There is no gain or loss recognized on the sale of the asset to the trust. On the death of the grantor, the assets in the trust, no matter what their then value, are not part of his or her estate. However, any repayment of the promissory note retained by the grantor, or the remaining value of the note at the grantor’s death will be part of his or her taxable estate.
These are complex concepts. Call to discuss this type of planning if you think something like this would be appropriate for you.