Grantor Retained Income Trusts (GRITs)

Grantor retained income trusts, or GRITs, can serve as a valuable estate-planning tool. They allow individuals to remove property from their estate, while at the same time both retaining the income produced by the property and reducing the value of the gift for gift tax purposes.

Advantages of GRITs

In a GRIT, the grantor makes a transfer of property into an irrevocable trust, retains the right to receive the income from the trust property for a set term, and gets to discount the value of the property transferred for gift tax purposes by taking into consideration the value of the retained income interest.

In discounting the value of the gift, the retained interest is subtracted out of the value of the property in determining the amount of the gift. This means that the value of the transfer is less for gift tax purposes than an outright gift of the property would be.

A significant advantage of this transfer is that it removes the property from the estate of the grantor, so long as the grantor survives the term of the trust. This means that the property transferred is able to avoid the estate tax at the grantor’s death. Consequently, GRITs can serve as valuable tools for utilizing valuation discounts to remove property from one’s estate without foregoing the income from the property transferred.

Disadvantages of GRITs

One of the significant disadvantages of GRITs is that the trust property could still be considered part of the grantor’s estate for estate tax purposes if the grantor does not survive the term of the trust. That is, if the grantor dies before the trust terminates, the trust property will be considered the property of the grantor and therefore included in his or her estate.

So, for example, if an individual were to set up a GRIT with a term of 15 years but dies 10 years later, the entire value of the trust will still be included in the grantor’s estate and subject to the estate tax.

Probably the most significant disadvantage, however, is Section 2702 of the tax code that precludes the ability to set up GRITs for the benefit of lineal ancestors (parents or grandparents), lineal descendants (children or grandchildren), spouses, or siblings. (See more here.) GRITs are therefore generally only useful for leaving property to nieces and nephews, cousins, and friends.

Therefore, unless you have a very large estate and want to include nieces, nephews, cousins, or friends in your estate plan, GRITs are probably not for you. Nevertheless, if you do fit this criteria, a grantor retained income trust may serve you well.

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See Also:

Irrevocable Living Trusts

Planned Giving Strategies