Legal Definitions - grantor-retained income trust

A Grantor-Retained Income Trust (GRIT) is a type of irrevocable trust established by an individual (the "grantor") who wishes to transfer assets to beneficiaries while potentially reducing the amount of estate taxes owed upon their death. In a GRIT, the grantor places assets into the trust for a specific, limited period of time. During this period, the grantor retains the right to receive the income generated by those trust assets.

The core idea behind a GRIT was to remove the value of the assets from the grantor's taxable estate. If the grantor survived the specified trust term, the assets would then pass to the designated beneficiaries free of estate or gift taxes. However, there were strict conditions: the beneficiaries could not be close family members (like a spouse or children), and if the grantor passed away before the trust term ended, the assets would revert to their estate, losing the intended tax benefits.

It's important to note that changes in tax laws during the 1990s significantly limited the effectiveness and applicability of GRITs, particularly regarding who could be a beneficiary and how assets were valued. As a result, GRITs are now rarely used, with individuals typically opting for other types of grantor-retained trusts that offer more favorable tax treatment under current regulations.

Here are some examples illustrating how a GRIT was designed to work:

• Example 1: Supporting a Distant Relative
  Mr. Arthur Jenkins, a wealthy widower with no children, wanted to ensure his beloved grand-niece, Clara (who is not considered a "close relative" under GRIT rules), would inherit a significant portion of his wealth without it being heavily taxed. He established a GRIT, placing a portfolio of income-generating bonds into it for a term of 10 years. For those 10 years, Mr. Jenkins received all the interest payments from the bonds. If he lived past the 10-year mark, the entire bond portfolio would then transfer to Clara free of estate taxes. If he had passed away before the 10 years were up, the bonds would have returned to his taxable estate.

• Example 2: Benefiting a Charitable Organization
  Dr. Evelyn Reed, a retired physician, owned a commercial property that generated substantial rental income. She wanted to donate this property to a medical research foundation she deeply admired, aiming to reduce her future estate tax burden. She created a GRIT, transferring the property into it for a 7-year term. During this period, Dr. Reed continued to receive all the rental income from the property. After 7 years, assuming she was still alive, the property would automatically transfer to the research foundation without being subject to estate taxes.

• Example 3: Passing on a Unique Asset
  Ms. Olivia Chen owned a valuable collection of rare books that occasionally generated licensing fees when loaned to museums for exhibitions. She wished for this collection to eventually go to a university library's special collections department, minimizing potential estate taxes. She established a GRIT, placing the book collection into it for a 5-year term. For those five years, any licensing fees generated by the collection were paid directly to Ms. Chen. If she survived the 5-year term, the entire collection would then pass to the university library without estate tax implications.