Grantor Annuity Trust A LEGACY OPPORTUNITY IN A LOW INTEREST RATE ENVIRONMENT The Prudential Insurance Company of America 0266054-00005-00 Ed. 06/2016 Exp. 12/29/2017
ABOUT THIS BROCHURE This brochure is designed to provide general information about the subject matter covered. It should be used with the understanding that we are not giving investment, legal, accounting, or tax advice. Such services should be provided by your own professional advisors. Accordingly, any information in this document cannot be used by any taxpayer to avoid penalties under the Internal Revenue Code. Consult your own professional advisors on how any product discussed may benefit your particular situation and how best to utilize any such product.
GRANTOR ANNUITY TRUST What if there were a cost-effective way to transfer future income and asset appreciation to your heirs with minimal or no gift taxes? And what if that strategy also allowed you to: Use a low interest rate environment to your advantage? Take back 100% of the transferred principal via annual annuity payments? Strengthen the effectiveness of your other wealth transfer plans? It s possible when you implement a grantor retained annuity trust (GRAT). THE BENEFIT OF A GRAT IN A LOW INTEREST RATE ENVIRONMENT When using a GRAT in a low interest rate environment, you and your beneficiaries are at an advantage when interest rates are lower than the actual growth of the assets held in the trust. This is because your annuity (income) payments are credited with a fixed rate of interest and any growth and income above the interest rate passes to your beneficiaries at the end of the trust term. Your transfer of assets results in a smaller gift than would otherwise be the case, or, perhaps, no gift at all. The low interest rate makes this possible because the value of your annuity in future dollars is close to the asset value today. In other words, and according to GRAT rules, you will get back what you transferred to the trust. But actual asset performance can result in significant wealth transfer. No one knows when interest rates will rise. Until then, a GRAT may open a window of opportunity to help you increase your legacy.
GRANTOR ANNUITY TRUST A GRAT allows you to share the future appreciation of an asset with the next generation with minimal or potentially no gift tax. It s an irrevocable trust funded with assets; it can be based on the term of a life or a specific number of years. An annuity percentage of the original assets transferred to the GRAT is paid to the grantor over the term of the trust. Any remaining assets are distributed to the beneficiary(ies) at the end of the term. ESTABLISH A GRANTOR RETAINED ANNUITY TRUST (GRAT). ANNUITY PAYMENTS ARE CREDITED WITH A FIXED RATE OF INTEREST. EXCESS GROWTH OF TRUST ASSETS PASSES TO YOUR HEIRS. IMPLEMENTING A GRAT IN YOUR WEALTH TRANSFER PLAN CAN BE AN EFFECTIVE STRATEGY. How a GRAT Works 1. 2. 3. With your legal and financial advisors, you, as the grantor, establish a Grantor Retained Annuity Trust (GRAT). It s irrevocable and funded with assets of any type, including shares of a business. Once the assets are transferred to the GRAT, you retain the right to receive annuity payments, either in cash or shares, over a term that you choose. It may be for a specified period of years or for your lifetime. Your annuity payments are credited with a fixed rate of interest. Any growth and any income above the interest rate passes to a remaining beneficiary at the end of the trust term. So, for example, if your interest rate is 2% and growth and income averages 10% over the term, your beneficiary receives the cumulative 8% advantage. This is especially advantageous if you establish a GRAT during a period of low interest rates. The minimum rate of interest is set by the IRS. This rate changes every month, but you may choose a rate from the most recent three months when the trust is finalized. The rate is fixed for the trust term, no matter how long, and no matter how the trust assets perform. THE BENEFIT OF AN IRREVOCABLE LIFE INSURANCE TRUST (ILIT) IN A LOW INTEREST RATE ENVIRONMENT The grantor cannot revoke, terminate, or modify the ILIT in any material way. In turn, the life insurance death benefit will not be included in your estate and not subject to federal estate taxes, preserving more of your assets for your intended heirs. A low interest rate allows more assets to remain in trust because the trust s expenses are lower. No one knows when interest rates will rise. Until then, you have a window of opportunity.
GRANTOR ANNUITY TRUST Low interest rates can help build your legacy now HYPOTHETICAL EXAMPLE This information is hypothetical and not representative of any particular product. ILIT GRAT CASH VALUE LIFE INSURANCE POLICY 1 GRANTOR(S) 2 3 $5,000,000 ($562,000) TERM OF 10 YEARS 4% ASSET GROWTH AND 2% INCOME $1,500,000 4 END OF TERM $1,500,000 5 GRANTOR(S) 6 ($562,000) CASH VALUE $10 MILLION DEATH BENEFIT 7 ILIT BENEFICIARIES This example assumes a 10-year GRAT using a 2.2% 7520 discount rate. Grantor premium loans are subject to the final split dollar regulations ( the Regulations, 26 CFR 1.7872-15, et al.). The example assumes the split dollar loans receive adequate interest treatment under the Regulations. 1 2 3 4 5 6 7 The grantor loans $150,000 to his or her ILIT; the trustee uses this money to pay the premium on a life insurance policy insuring the grantor s life. A total of ten annual premiums are due; the grantor makes ten annual loans. The grantor contributes $5 million of assets to the GRAT, earning 2% annual income and 4% annual growth. At the end of the first year, the GRAT makes the first of ten equal annuity payments of $562,000 to the grantor. At the end of year 10, the GRAT pays its remaining value of $1.5 million to the ILIT. The GRAT makes the final annuity payment to the grantor. The ILIT trustee uses $1.5 million to repay the grantor(s) the ten $150,000 premium loans. The ILIT beneficiaries have access to the life insurance policy cash value and death benefit, as the trust permits. If permitted, life insurance policy cash value can be accessed through policy loans and withdrawals. Unpaid loans and withdrawals will reduce cash values and the death benefit.
Important Information about GRATs As with most financial strategies, there are a number of considerations that require the attention of qualified tax and legal advisors. GRATs are governed by strict rules found in the Internal Revenue Code. If you die during the trust term, most of the value of the trust assets, including appreciation, may be included in your taxable estate. The grantor s generation-skipping transfer tax (GSTT) exemption may not be allocated to amounts contributed to a GRAT. During the trust term, the GRAT grantor is taxed on all items of trust income, even if he or she does not receive the income. Your financial professional is part of a team that includes you and your legal and tax advisors. When implementing this strategy, it s important to work with your tax and legal professionals to help ensure it s properly structured.
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