A retained income trust is a type of irrevocable trust, whereby an individual (called the grantor) transfers assets to a trust and then retains an interest for a period of time or for life. The retained interest may be the right to receive payments, or it may be the right to use the property in the trust. At the end of the retained interest period, the property in the trust passes to the remainder beneficiaries of the trust.
Retained income trusts are valuable estate planning tools because the value of the initial transfer into the trust may be able to be discounted for federal gift and estate tax purposes, subject to certain requirements. The size of the discount will depend on the length of the retained interest and the applicable federal interest rate that must be used to discount the gift. Furthermore, if the grantor outlives the term of the retained interest, then the assets, including any appreciation in the assets, will not be included in his or her gross estate. Thus, transferring assets into a retained income trust can be an excellent way to remove assets (especially appreciating assets) from your estate while allowing you to receive a benefit from those assets for a certain period of time.
How a Grantor Retained Income Trust (GRIT) Works
What are the different types of retained income trusts?
Grantor retained annuity trust (GRAT)
With a GRAT, the payment you receive will be an annuity, which is a fixed amount. The payments from the trust to you may be made once a year or more often, if you desire.
Grantor retained unitrust (GRUT)
With a GRUT, the payment you receive will be a fixed percentage of the value of the assets in the trust determined annually. Thus, if the value of the assets in the trust increases, then the payments to you will increase as well. The payments from the trust to you may be made once a year or more often, if you desire.
Grantor retained income trust (GRIT)
A GRIT differs from a GRAT or a GRUT because transfers generally cannot be made to family members. For discounts to apply to transfers to family members, a GRAT or GRUT must be used. However, there is a significant exception for transfers of a personal residence. You can transfer your personal residence to a GRIT and name family members as the remainder beneficiaries. This special type of GRIT is known as a qualified personal residence trust (QPRT).
GRITs can also be useful estate planning tools for unmarried couples.
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Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2017.