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Using GRAT Trusts in New York

A GRAT trust is a tool used by wealthy families (such as the Waltons) to save money on estate taxes. The acronym GRAT stands for “grantor retainerd annuity trust”. To form a GRAT, individuals transfer assets into a trust for the benefit of the those they want to leave money to, while retaining an annuity to themselves. The annuity will be at the rate set by the government for GRATs, known as “the 7520 rate,” which is currently about 2.6%. Any interest or gain in value over the 7520 rate can be kept by the trust beneficiaries tax-free.

Income and other taxes on the trust are paid by the person who set up the trust, because this is a grantor trust. As long as the lifetime value of the annuity is equal to the amount of money in the trust, and the settlor get his or her annuity, the IRS will not bother the beneficiaries.

The tricky part is, if the grantor dies before the term of the annuity expires, the trust will be taxable at the full estate tax rate, which can be up to 55%. That’s why it’s important to not set the term too high, especially for elderly individuals.

A GRAT is a great way to transfer wealth while saving on estate taxes. Call us at (212) 233-1233 to discuss a GRAT or other estate planning tools.