How Can You Benefit from a Grantor Retained Annuity Trust? | IL

Those who want to secure their financial future and legacy might consider a Grantor Retained Annuity Trust, abbreviated as a GRAT. This type of trust allows those with a certain level of assets to pass those assets on to their beneficiaries while significantly minimizing estate tax liabilities. A GRAT is an irrevocable trust, meaning once it is put into place, it cannot be altered or dissolved.

Because of this, it is essential that you speak to an experienced Naperville, IL, estate planning attorney from Gierach Law Firm, who can help you decide if a GRAT is right for you and then guide you through the process. Gierach Law Firm is well-equipped to help you understand the intricacies of this document while thoroughly explaining how a Grantor Retained Annuity Trust can benefit you and your heirs.

Understanding Grantor Retained Annuity Trusts

The grantor transfers assets into a trust and then receives annuity payments from the trust for a specified period of time. Once the term has ended, all remaining assets will pass to beneficiaries without incurring estate taxes. GRATs are often used for appreciating assets and for high-value assets. The grantor creates the GRAT, placing his or her own assets into the trust. This means that the grantor receives the rewards from the trust while also taking on potential risks.

Ultimately, the grantor must outlive the term of the GRAT to receive the full benefit of the trust. The beneficiary can be a family member or a charitable organization, but GRATs are commonly used to benefit loved ones. The trustee will oversee the GRAT and is responsible for ensuring compliance with the terms of the trust. 

What Are the Primary Benefits of a GRAT?

There are a number of benefits reaped from a GRAT, including:

•  Illinois state taxes can be planned for via asset transfer.
• The grantor receives annual, fixed payments for the term of the trust.
• The GRAT may have a positive impact on Illinois state tax through estate and gift tax savings.
• Assets placed in a GRAT can include real estate, stocks, cash, and more.
• There are no state-specific risks; if the grantor dies before the end of the term, the assets revert to the estate.
• Trusts do not have to go through Illinois probate.

Why Are GRATs Popular?

The state of Illinois is one of the few states with its own estate tax, separate from the federal estate tax. This makes GRATs an attractive way to minimize federal and Illinois estate taxes. GRATs offer flexibility in that a wide range of assets can be transferred into the trust. The terms of the GRAT can be customized as far as terms and conditions. The annuity in a GRAT can be structured in such a way that, in theory, there will be no assets left for beneficiaries, thus reducing the gift tax to zero.

However, timing and the prevailing interest rates are crucial to a GRAT. It is also worth noting that GRATs are most effective when the assets in the trust will most likely outperform the annuity payments, creating a surplus that will pass to the grantor’s beneficiaries with no taxes attached.  The performance of the assets placed in the GRAT can compromise the effectiveness of the trust, leaving less for the beneficiaries than the grantor intends. Some people use a GRAT technique known as “laddering.” This means that multiple GRATs are created, with each having a different time frame. Illinois allows asset swapping in GRATs when the original assets placed in the GRATs are underperforming.

Contact a Naperville, IL Trust Attorney

A GRAT can be a part of a more complex estate plan that will result in a plan that is specifically tailored to your unique goals and needs. When you choose a Naperville, IL trust attorney from Gierach Law Firm, you have taken an important step toward ensuring your loved ones are taken care of after you are gone. You will also benefit from wise estate planning. Attorney Denice Gierach brings her education as a lawyer, a CPA, and a master’s degree in management to the table. Contact Gierach Law Firm at 630-228-9413 to discuss your estate planning needs.