Grantor Retained Annuity Trust

The grantor retained annuity trust is a planning tool to transfer wealth to family members at an artificially reduced value, like the FLP, a GRAT is an accepted means of minimizing estate taxes. You can place an asset such as stocks, commercial real estate or shares of a family business in a trust that pays you a fixed annual annuity for a set number of years. How does it minimize estate taxes? At the end of that term what's left in the GRAT goes to your kids. The only catch is that you have to outlive the GRAT term. Choose a term that is less than your life expectancy.

The value of what's left for the kids, for gift tax purposes, is calculated by subtracting from the trust's value the discounted present value of your annuity. The discount rate comes from a formula based on Treasury note yields. At the moment, Treasury yields are low. That makes the annuity look valuable and the remainder look small. If your assets earn more the than Treasury yield, you will have got a break on gift taxes.

If you bet wrong and the assets you stick in a GRAT become depressed, there will be nothing left for the kids and you'll be out the setup fees (lawyer and appraiser fees, plus annual accounting fees).