Grantor Retained Interest Trusts

Another method of reducing your taxable estate and limiting estate tax at your death is to transfer ownership of your property during your lifetime to a trust for the benefit of others while keeping a retained interest in the transferred property for yourself.

As with everything, certain rules apply. Generally, if a grantor gives away partial ownership of an asset but retains an interest in the property for as long as he lives, the entire value of the asset will be include in his estate. This typically happens where a taxpayer transfers significant ownership of assets to a trust for the benefit of his family and keeps the right to income from the transferred assets for life (or if the property is the family residence, retains the right to live in the residence for life). Mere possession of the retained right will cause the property to be included in the grantor's estate even if the grantor never received benefits from, or otherwise utilized the right.

To preclude inclusion of the entire value of the property in the grantor's estate, the retained interest must be for a designated period of time instead of for life or until a specified dollar amount is reached. If the grantor dies before the designated term is reached (or specified amount), the entire value of the property will come back into his estate. If a gift tax was paid during life, the grantor's estate is allowed a credit.

The granting of the remainder interest (transfer of ownership to the trust) for the benefit of another, is a taxable gift in the year the transfer was made (the trust was set up) and is subject to gift tax. The gift is not eligible for the annual gift tax exclusion as the beneficiaries will not receive the property until the end of the term, making the gift one of a future interest and not a present interest as required to qualify for the annual exemption. While the grantor will not be required to pay any gift tax until his lifetime gifts total more than the $5,340,000 exclusion provided by the unified credit, taxable gifts will use up part (or all) of this credit, which could have been available for the grantor's estate (see Federal Transfer Tax).

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