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Simple English definitions for legal terms
grantor-retained trust
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A quick definition of grantor-retained trust:
A grantor-retained trust is a special type of trust that helps wealthy people reduce the amount of taxes they have to pay when they pass away. The person who creates the trust (called the grantor) gets some money from the trust for a certain number of years, and then the property in the trust goes to someone else without having to pay estate taxes. This type of trust is usually made with things that will grow in value a lot, so that the value of the trust goes up without having to pay taxes on it. There are three different kinds of grantor-retained trusts: annuity trusts, unitrusts, and income trusts.
A more thorough explanation:
A grantor-retained trust is a type of irrevocable trust that is created to reduce estate taxes. It is mostly used by wealthy individuals to limit estate and gift taxes. The grantor receives some form of income from the trust for a set amount of years, and then the property is transferred to a beneficiary free of estate taxes.
There are three main types of grantor-retained trusts:
- Grantor-Retained Annuity Trusts (GRATs): With a GRAT, the grantor receives a fixed annuity payment from the trust for a set number of years. At the end of the term, the remaining assets in the trust are transferred to the beneficiary.
- Grantor-Retained Unitrusts (GRUTs): With a GRUT, the grantor receives a percentage of the trust's value each year for a set number of years. At the end of the term, the remaining assets in the trust are transferred to the beneficiary.
- Grantor-Retained Income Trusts (GRITs): With a GRIT, the grantor receives all of the income generated by the trust for a set number of years. At the end of the term, the remaining assets in the trust are transferred to the beneficiary.
For example, let's say a wealthy individual creates a GRAT and funds it with $1 million worth of stock. The grantor receives a fixed annuity payment of $50,000 per year for 10 years. At the end of the term, any remaining stock in the trust is transferred to the beneficiary free of estate taxes. If the stock has grown in value during the 10-year term, the beneficiary will receive the appreciated value tax-free.
In this way, grantor-retained trusts allow wealthy individuals to transfer assets to their beneficiaries while minimizing estate and gift taxes.