Are you at or nearing the estate tax threshold and own a home, other property, or accounts that could appreciate in the future? Depending on your circumstances, certain estate planning tools, such as a grantor retained annuity trust (GRAT), grantor retained unitrust (GRUT), or qualified personal residence trust (QPRT) may help with your goals.

Are you one of the following:

A high-net-worth person who has income-producing accounts and property.

Although someone with income-producing accounts and property enjoys the income he or she receives, depending on your overall net worth, you may want to consider transferring the accounts or property out of your estate to save estate taxes that could be incurred upon your death. You can receive income for a period of time, and then transfer any remaining value in the trust at a stated time to your named beneficiary. Any remainder that is transferred is done so with no estate tax liability and no or minimized gift tax liability.

A high net worth person with accounts and property that are likely to appreciate in the future.

If you are over the lifetime exclusion amount and have accounts and property that are likely to appreciate in the future (such as a residence) you will likely be looking for a way to reduce your estate tax liability. Certain estate planning tools can assist in transferring the appreciation to beneficiaries instead of accumulating in your state.

In a nutshell

A GRAT

Is an irrevocable trust that is used to make large financial gifts to loved ones while also minimizing the gift tax liability. You can create a GRAT and fund it with accounts and property, such as those that are expected to appreciate in value over the term of the GRAT. Then, you can receive an annuity (a fixed percentage based on the original value of the trust) for a specific period of time. When the trust ends, the remainder is given to the named beneficiary.

A GRUT

Is an irrevocable trust that is similar to a GRAT. One can establish a GRUT, transfers accounts and property to the trust, retains a right to receive an annuity (based on a fixed percentage of the current year’s trust value), and at the termination of the trust, the retaining trust assets are given to the named beneficiaries.

A QPRT

is an irrevocable trust that one can use to remove their residence from their overall estate. You fund the residence into a trust, retain the right to use and enjoy the property for a specific period, and once that time terminates, the residence is transferred to the named beneficiary. During the QPRT’s term, one can claim an income tax deduction for real estate taxes paid on the residence. For these tools to be successful, one must outlive the term designated in the trust. It is therefore important that one does not wait too long to create trust.

Keep in mind that the GRAT and GRUT must increase in value at a higher rate than the Internal Revenue Code (I.R.C.) § 7520 rate. The I.R.C. § 7520 rate is used in determining the annuity amount that is paid to the trust maker each year. If the trust does not generate a higher return than the I.R.C. § 7520 rate, there will be nothing remaining in the trust to distribute to the beneficiary at the trust’s termination.