What is a Grantor Retained Annuity Trust?

Creating a grantor retained annuity trust can be an incredibly helpful tool for those planning to leave property or assets to their children or grandchildren. The primary purpose of a grantor retained annuity trust is to transfer one or more high-yield assets into an irrevocable trust while still benefiting from annuity payments. A grantor retained annuity trust is a type of trust that helps you minimize your tax liabilities when you transfer your assets to your children or grandchildren.

A grantor retained annuity trust is an irrevocable trust that will last for the period of time specified in the trust agreement. An irrevocable trust is a type of trust that cannot be altered once the assets or funds have been placed in the trust. By removing the ability to alter the trust, the trust is protected from certain estate taxes and certain creditors. Creating a grantor retained annuity trust can be a helpful estate planning tool, especially if you plan on transferring assets to your children or grandchildren.

When you create a grantor retained annuity trust, you transfer a lump sum payment of assets or funds into an irrevocable trust and specify the number of years your grantor retained annuity trust will remain in effect. Each year, the grantor will receive an annuity payment until the trust funds drop below the annuity payment amount. The interest rate of return is affected by the number of years in which your grantor retained annuity trust lasts for. Upon your death, the assets remain owned by the trust in care of your appointed beneficiaries. Per the terms of the trust, your chosen beneficiaries will receive the assets outside of the probate court process.

Creating a grantor retained annuity trust allows you to continue receiving an income from your assets while avoiding gift taxes after you pass away and your assets transfer to your children or grandchildren. The gift tax your beneficiaries will pay is determined at the time that the grantor retained annuity trust is created. The Internal Revenue Service (IRS) assumes that any assets you transfer into your grantor retained annuity trust will increase at a statutorily specified rate outlined in section 7520 of the IRS code. As a result, if your assets appreciate over the rate specified in the relevant statute, they will pass to your beneficiaries free of gift and estate taxes. For example, if your assets generated an income of 7%, and the statutorily specified rate is 3%, the extra 4% will not be subject to estate or gift taxes.

Some limitations come with creating a grantor retained annuity trust. It is crucial that the trust be established and administered according to the relevant IRS regulations. You will need to ensure strict compliance with Section 2702 of the IRC because non-compliance can result in financial penalties. Non-compliance with the statute can include the following:

• Failure to make timely payments of the annuity to the grantor
• Making additional contributions to the trust after initially funding the trust
• Increasing the annual annuity payment from the trust by more than the allowed percentage
• Issuing a form of payment to the grantor that is impermissible

Additionally, grantor retained annuity trusts are irrevocable trusts, making them less flexible than revocable living trusts. There are some limited ways to modify an irrevocable trust, but it is more complicated. If you would like to maintain complete control over your assets and have more flexibility when it comes to your trust agreement, you may want to consider another type of trust.

Understanding the different types of trusts can be challenging. Having an estate planning lawyer on your side is beneficial to help you determine the best estate planning tools for your estate goals. At Arnold & Smith, PLLC, our lawyers will carefully review your financial situation and your goals. Utilizing our knowledge of North Carolina estate planning laws, we will evaluate whether it would benefit you to include a grantor retained annuity trust in your estate plan. If so, we will create a complete and legally valid trust, allowing you to take advantage of all of the tax benefits that come along with it. We will also assist you in creating other types of trusts if a grantor retained annuity trust is not right for you. Contact our Charlotte, Mooresville, and Monroe estate planning law firm today to schedule your initial consultation.