Understanding Estate Taxes
22. Grantor retained annuity trust (GRAT)
If you own income-producing assets-like stocks, a business, or real estate-that you would like to remove from your estate, but you need the income, a GRAT may be the answer.
A GRAT is similar to a personal residence trust. But a GRAT lets you remove any asset, not just your home, from your estate. And, for a set number of years, you receive an income from the assets in the trust.*
When the trust ends, the asset will be owned by the beneficiaries of the trust (usually your children), so it will not be included in your estate when you die. However, depending on the duration of the trust, if you die before the trust ends, some or all of the asset may be included in your taxable estate.
Like the personal residence trust, the beneficiaries will not receive the asset until sometime in the future - when the trust ends. So the value of the "gift" you are making to the trust is reduced. Again, this uses less of your estate tax exemption than if you keep the asset and any future appreciation in your estate until you die.
*If the income is a set amount, the trust is called a GRAT (Grantor Retained Annuity Trust). If the income fluctuates, it is called a GRUT (Grantor Retained Unitrust).