Trusts can be useful in estate planning for passing on assets to your heirs. A grantor retained income trust (GRIT) is a specific type of trust that allows you to transfer assets while still benefiting from the income they generate. This is a little more advanced than a typical revocable living trust, but establishing a GRIT could yield some advantages. If you’re looking for ways to minimize taxes in your estate plan, you may wish to consider a grantor retained income trust.
Grantor Retained Income Trust, Definition
A grantor retained income trust allows the person who creates the trust to transfer assets to it while still being able to receive net income from trust assets. The grantor maintains this right for a fixed number of years.
A GRIT is a type of irrevocable trust, meaning the transfer of assets is permanent and can’t be reversed. This is different from a revocable trust, which allows you to change the terms as needed.
How a GRIT Works
A grantor retained income trust is created through a written trust agreement. The grantor is the person who creates the trust and transfers assets to it. The trustee is the person who’s responsible for overseeing the trust, according to the terms set by the grantor. The grantor has the right to receive net income from the assets held in the trust. The trustee distributes income to the grantor, according to the trust terms. For example, distributions of income could be made annually, quarterly or at any other frequency chosen by the trust grantor.
Once the initial term during which the grantor is eligible to receive income from the trust expires, one of two things can happen. First, the remaining assets in the trust can be distributed to its beneficiaries.
It’s important to note that unlike other types of trusts, there are rules on who can receive a transfer of GRIT assets. Specifically, there are certain people who cannot be named as a beneficiary to a GRIT, including your:
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Spouse
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Parents or spouse’s parents
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Children or spouse’s children
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Siblings or spouse’s siblings (or their spouses)
You can, however, name the children of your siblings or other distant relatives as the beneficiary to a GRIT.
If you don’t want the trust assets to pass on to beneficiaries right away, the other option is to continue to hold those assets in trust. Beneficiaries can still receive assets from the trust, though it would happen at a later date. The grantor could decide when beneficiaries would be eligible to receive assets. For example, they may have to reach a certain age first, or the transfer may not happen until the grantor passes away.
Benefits of Establishing a GRIT
A grantor retained income trust is typically used for one specific purpose: to minimize taxes in estate planning. Keeping estate taxes as low as possible means you have more assets to pass on to your beneficiaries when you die.
When assets are transferred to a GRIT, they’re valued at a discount. This discount depends on the number of years for which you plan to draw income from the trust as the grantor. Assuming that you outlive the initial term over which you’re supposed to receive income from net assets in the trust, any remaining assets pass on to your beneficiaries at a reduced gift tax value. The principal value of assets included in the trust are excluded from your estate for estate and gift tax purposes.
You’d still be taxed on the income you receive from a grantor retained income trust during the initial term, but it’s taxed at your ordinary income tax rate. The key thing to know about setting up a GRIT for the purpose of minimizing estate taxes is that you have to outlive the initial term. If you die during the period in which you’re still receiving income from the trust assets, no estate or gift tax benefit would pass on to your beneficiaries.
Who Should Consider a Grantor Retained Income Trust?
A GRIT can offer some tax benefits if it’s set up properly and you outlive the initial term in which you receive income from the trust. But because of its more complicated structure, it may not be right for everyone. You may consider setting up a grantor retained income trust if you already have other trusts that are designed to benefit your spouse, children and other immediate relatives. But note that since these trusts are irrevocable, you have to be certain about the transfer of assets and confident in your ability to outlive the initial term.
If you change your mind later after transferring assets to the trust, you won’t be able to change the trust terms. So, some of the key things to consider before establishing a GRIT are:
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What other steps you’re taking to minimize taxes in your estate plan
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Which assets are best suited to a GRIT (i.e. income-producing vs. non-income producing)
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Who you can or want to name as beneficiaries to the trust
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How likely you are to outlive the initial term
Talking with an estate planning attorney or your financial advisor can help. They can go over the pros and potential cons of including a GRIT in your estate plan to help you decide if one makes sense or not.
For example, you might be better off with something like a grantor retained annuity trust or GRAT instead. With this type of trust, the transfer of assets is also irrevocable. But you can use a grantor retained annuity trust to make financial gifts to family members, while passing on assets to beneficiaries tax-free. This type of trust could be a better fit if you want to create a legacy of wealth for your children or grandchildren while potentially reaping significant estate tax savings and gift tax savings.
The Bottom Line
Grantor retained income trusts can serve a specialized purpose as part of your estate plan. But whether you need one can depend on a variety of factors, including the other working parts of your financial plan. But if you can utilize one in your estate successfully, you could realize substantial tax savings.
Tips on Estate Planning
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Consider talking to your financial advisor in more detail about how a GRIT works and how it can be used in an estate plan. If you don’t have a financial advisor yet, finding one doesn’t have to be complicated. SmartAsset’s financial advisor matching tool can help you connect with professional advisors in your local area. It takes just a few minutes to get your personalized advisor recommendations online. If you’re ready, get started now.
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Trusts are just one way to manage taxes and it’s important to consider other options as you invest and grow wealth. Making sure you have the right asset location, for example, is important for maintaining tax efficiency in your portfolio if you have a mix of both tax-advantaged and taxable accounts. Activities like tax loss harvesting can also help to minimize the amount of taxes you’ll owe on your investment gains each year.
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