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A Grantor Retained Unitrust (GRUT) provides the grantor with a fixed percentage of the value of the irrevocably transferred property (determined annually) for a fixed period of years. The remainder interest generally passes to the grantor�s designated beneficiaries at the end of a specified term or at the earlier part of the end of a specified term or the grantor’s death.A grantor retained unitrust may be an effective means for a wealthy client who wants or needs to retain all or most of the income from a high-yielding and rapidly appreciating property to transfer the property to a child or other person with minimal gift or estate tax. GRUTs are particularly indicated where the client has one or more significant income-producing assets that he or she is willing to part with in the future to save federal and state death taxes, to probate costs, to obtain privacy on the transfer, and to protect the asset against the claims of creditors.
A GRUT is created by transferring one or more high-yield assets into an irrevocable trust and retaining the right to an annuity interest for a fixed term of years or for the shorter of fixed term or life. When the retention period ends, assets in the trust (including all appreciation) go to the named “remainder” beneficiary(ies). In some cases, other interests such as the right to have the assets revert back to the transferor’s estate in the event of the transferor’s premature death, may be included.
If family members are involved, the gift tax valuation rules of IRC §2702 may apply. Under these rules, certain types of retained interests, such as the right to have trust assets revert to the transferor’s estate in the event of the transferor’s premature death, may be valued at zero when computing the gift tax value of the transfer. As a general rule, every retained interest but a “qualified interest” is assigned a value of zero for gift tax valuation purposes.
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