Grantor Retained Annuity Trust (GRAT)
When you create a Grantor Retained Annuity Trust (GRAT), the grantor will receive a stream of income, at least annually, for the term of the trust. The payout is based on the present value of assets using the effective AFR Rate. As a result of this payout requirement, there is often little to no estate tax exemption used when you fund a GRAT.
As interest rates get lower, the required payout also gets lower. When interest rates are low, it is easier for the growth and income generated by assets in the trust to be greater than the required payouts, leaving more assets inside the trust at the end of the day. When the trust terminates, anything left in the trust is transferred to the remainder beneficiary often children or trusts set up for the benefit of children.
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Part 1 of our Article addressed why a charitably-inclined client should make a gift to charity in the year of business sale.
Having completed the analysis of when it is best to make a gift, some clients may hesitate to make a large charitable gift in the year of the liquidity event because it may not allow them to meet other objectives, such as providing for children or retaining funds for themselves. These clients can meet these “split” objectives of providing benefits for themselves or family members with a “split-interest” trust. A charitable lead trust allows a current charitable income tax deduction, while providing a benefit for children. A charitable remainder trust allows a current income tax deduction, while also permitting the client to retain access to income.