Simple English definitions for legal terms
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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 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:
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.