In Tennessee, trusts can be established to achieve many different goals. One type of trust that can benefit families is a grantor retained annuity trust. This can allow the grantor to pass substantial assets to the intended beneficiaries without having to pay gift taxes.

How a grantor retained annuity trust works

A grantor retained annuity trust, or GRAT, is a trust instrument that is created to allow a grantor to pass substantial assets to family members while avoiding most or all gift taxes. It is irrevocable, meaning that it cannot be changed after its creation. The GRAT will exist for a specific term. Once the GRAT is funded with the grantor’s assets, the trust will own the assets and have power over them. The grantor can include provisions in the trust to allow it to receive the original value of the assets contributed to the GRAT during the trust’s term. Since these trusts are normally used to hold and transfer substantial assets from one generation to the next, the original value of the assets will often be enough for the grantor to live on. The trustee will invest the assets held by the trust. When the term ends, the remaining assets will be passed to the beneficiaries as designated by the trust’s terms.

Why do people create GRATs?

GRATs are normally created by people who have vast wealth and whose families would likely have to pay estate taxes after their deaths. By creating a GRAT, the grantors can reduce the sizes of their estates to minimize their estate and gift tax liabilities. Since the federal estate tax exemption for 2021 is currently $11.7 million per individual or $23.4 million per married couple, this type of trust is typically attractive to only a small number of people.

If you have significant assets, talking to an estate planning attorney might help you to determine the best ways to minimize any potential estate and gift tax liability your family might otherwise face. Other types of trusts might also be created to accomplish other goals that you might have.