When you set up a GRAT or GRUT, you transfer an income-producing asset (like a family business, stocks or real estate) into an irrevocable trust for a set number of years. During this time, the trust pays you an income.
If the income you receive is a set dollar amount and does not fluctuate each year, the trust is a GRAT (that's why it's called a grantor retained annuity trust). If the income is a percentage of the trust assets and the amount of income you receive fluctuates each year, the trust is a GRUT (unitrust).
At the end of the trust term, the asset will be owned by the beneficiaries of the trust (usually your children) and will not be included in your estate when you die. However, if you die before the trust term is over, the asset will be taxed as part of your estate, just as it would have been if you had not implemented this technique. In other words, it's "heads you win, tails you tie".
Like the qualified personal residence trust, the beneficiaries will not receive the asset until sometime in the future (when the trust term is over). So the value of the gift you are making (transferring the asset to the trust is considered a gift) is reduced. This uses less of your federal gift and estate tax exclusion amount than if you had kept the asset (and any future appreciation in the value of that asset) in your estate.
A GRAT or GRUT can be a great way to save
estate taxes by transferring an asset (especially a
business) and any future appreciation, to your children
at a discounted value, especially if you want (or need)
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