Question

Which of the following statements regarding a Grantor Retained Annuity Trust is/are true? Pick all that apply and explain.

I. If the grantor survives the trust term, none of the trust assets are included in the grantor's gross estate

II. Interest and dividends earned by assets in a GRAT are taxed to the grantor (test answer)

III. If the grantor dies during the trust term, a pro rata share of the trust assets will be included in the grantor's estate

IV. At the end of the GRAT term, a taxable gift will occur when trust assets are transferred to the beneficiary

Answer 1

I and IV are True

I. If the Grantor survives the trust term , none of the trust assets are included in the grantor's gross estate. Grantor retains the right to receive an annual annuity payment for a certain number of years When the term of the GRAT ends, what is left in the GRAT is distributed to the trust beneficiaries (children or other beneficiaries of the trustmaker/grantor's choice).

IV. At the end of the GRAT term, a taxable gift will occur when trust assets are transferred to the beneficiary. -

The transfer of assets owned by someone into an irrevocable trust for the benefit of someone else would ordinarily be deemed a gift for federal gift tax purposes, but with a GRAT, since theoretically all of the assets transferred in could come back to the trustmaker/grantor, the value of the gift to the beneficiaries of the GRAT will be at or close to $0. This is called a “zeroed-out GRAT.”