Now that asset values are down, a grantor retained annuity trust (GRAT) may save estate tax. You, the grantor of the trust, transfer assets to the trust and receive a stream of income. You are not giving away your wealth because GRATs provide a return of the amount transferred plus an income stream that’s set in advance.
When the GRAT ends, usually after two or three years, any assets left in the trust go to the trust beneficiaries, who might be your children. Thus, a GRAT enables you to give away appreciation of the assets transferred to the trust.
The lower the current level of interest rates, the less that must be paid to the grantor as an annuity and the more appreciation that can pass to the trust beneficiaries. Interest rates are low now so putting stocks and other devalued assets into a GRAT can be a savvy strategy. If asset values recover during the trust term, the growth can be out of your estate and into the hands of your children, the GRAT beneficiaries.
