A Grantor Retained Annuity Trust, or "GRAT," is an irrevocable trust whereby the grantor transfers, via gift, assets to the trust for the benefit of his or her family while retaining an annuity stream of income for a period of years. Based on federal gift and estate tax laws currently in effect, the grantor pays a gift tax on the value of the property placed into the trust for the benefit of the GRAT's remainder beneficiaries, less the amount that he or she retains for him or herself as part of the annuity payment. The gift tax paid is discounted by a federally determined discount rate (based on the annuity term). This means that the grantor pays tax only on the remainder for the GRAT's beneficiaries. The net effect is that the grantor pays gift taxes today on the value of an anticipated remainder, rather than on what the actual remainder will be (which is unable to be determined at the time of the gift). If the remainder of the GRAT's assets, after paying the grantor over the term of years, exceeds the remainder value used for gift tax purposes upon the GRAT's formation, the excess assets are transferred estate tax free.

The proper use of a GRAT is a powerful tool to maximize wealth transfer by minimizing wealth transfer taxes. That being said, the key to successfully using this technique (as with all estate planning techniques) is to properly match the tool with the client and their circumstances. Not all clients are good candidates to employ every technique, and at B&M we understand that each client's plan must be tailored to the client's unique needs.