Legal Definitions - GRIT

GRIT stands for Grantor-Retained Income Trust.

A GRIT is a specific type of irrevocable trust used in estate planning. When an individual, known as the "grantor," creates a GRIT, they transfer assets into the trust but retain the right to receive the income generated by those assets, or to use the assets themselves, for a predetermined number of years. Once this specified term ends, the assets held within the trust are then transferred to the designated beneficiaries, typically family members, without being subject to further estate taxes. The primary purpose of a GRIT is often to reduce the value of a gift for tax purposes, as the value of the grantor's retained income interest is subtracted from the total value of the assets when calculating the taxable gift to the beneficiaries.

Here are some examples to illustrate how a GRIT might be used:

• Example 1: Passing on a Vacation Home

  Mr. Henderson owns a valuable vacation home that he wishes to eventually pass on to his children. However, he still wants to use the home for family holidays for the next ten years. He decides to create a GRIT, transferring the vacation home into it. The terms of the GRIT state that Mr. Henderson retains the right to use the home for ten years. After this ten-year period, ownership of the home automatically transfers to his children. By setting up the GRIT, Mr. Henderson potentially reduces the gift tax value of the home for his children, as the value of his retained right to use the property for ten years is factored into the initial gift calculation.

• Example 2: Transferring a Growing Investment Portfolio

  Dr. Lee has a substantial investment portfolio that she expects to grow significantly over the next several years. She wants to transfer this wealth to her grandchildren but also relies on the dividend income from the portfolio for a portion of her living expenses for the foreseeable future. Dr. Lee establishes a GRIT, placing her investment portfolio into it. The trust agreement specifies that she will receive all income generated by the portfolio for a period of seven years. At the end of this seven-year term, the entire portfolio, including any appreciation in value, passes to her grandchildren. This strategy allows Dr. Lee to continue receiving income while potentially minimizing the gift tax on the future transfer of the appreciated assets.

• Example 3: Gifting a Valuable Art Collection

  Ms. Chen is an avid art collector with several highly valuable paintings she intends to leave to her nieces. She enjoys displaying these pieces in her home and wants to continue doing so for another five years. To facilitate the transfer and potentially reduce future estate taxes, Ms. Chen creates a GRIT. She transfers the art collection into the trust, retaining the right to possess and display the artwork for five years. Once the five-year term concludes, the art collection is distributed to her nieces. This arrangement allows Ms. Chen to enjoy her collection for a set period while initiating the transfer of wealth to her beneficiaries in a tax-efficient manner.