Grantor Retained Unitrusts

Like a GRAT, a grantor retained unitrust (GRUT) is an estate planning vehicle to transfer appreciating income producing assets into an irrevocable trust for a term of years (or the life of the income beneficiary), retaining a qualified income interest while naming others, typically family members, as remainder beneficiaries at the end of the trust term. This has the potential of moving wealth plus future appreciation from the grantor's estate, while still providing the grantor with income for the trust term.

With a GRUT, the grantor transfers property to an irrevocable trust in return for the right to receive fixed percentage of the trust value at least annually based upon the fair market value of property which must be revalued each year. Therefore, as the assets in the trust increase or decrease in value during the term of the trust, the amount of the unitrust payment will also change. For example, if a grantor transfers $1 million in trust and retains the right to receive fifteen percent of the fair market value of the property, determined annually, for ten years, the grantor would receive $150,000 in the first year. If the assets in the trust increase to $1,100,000 in the second year, the unitrust amount would be $165,000. If in year three the value of the assets decreases to $900,000, the unitrust amount would be $135,000. If trust income is insufficient to fund the annual unitrust amount, it must be paid from trust corpus. Because of this requirement, a GRUT may be an inappropriate vehicle to transfer interests in a closely held business unless the business can distribute sufficient income (dividends, for example) to fund the unitrust payment.

If the grantor fails to survive the ten-year (in this example) term of the trust, the payments cease in the year of his death. Since the unitrust amount is based on the value of trust assets determined annually, additional contributions may be made to a GRUT. If the value of trust assets is expected to increase, a GRUT provides the potential for greater income to the grantor than does a GRAT. A GRUT may have more administrative costs, however, since the trust assets must be valued annually.

With an irrevocable trust, a taxable gift to the remainder beneficiaries occurs at the time the trust is created. Since the remainderman will not have beneficial enjoyment of the trust assets until the end of the trust term, the gift is of a future interest in property and does not qualify for the annual gift tax exclusion.

The taxable value of the gift to the remaindermen is the value of the assets placed in trust, reduced by the present value of the interest retained by the grantor, discounted by prescribed monthly IRS interest rates for the term of the trust. For example, Grantor transferred one million dollars of income producing assets into a 10-year trust for the remainder benefit of Son while retaining a fixed income interest for the term of the trust. Assume that the IRS rates for a 10-year trust value the retained interest at sixty-five percent. Grantor has made a taxable gift to Son in the amount of $350,000 rather than $1 million. The grantor may use her lifetime gift tax exclusion amount to eliminate the tax due on the discounted gift, or pay gift tax on that amount if she has already used her gift tax exclusion. By using a GRUT to affect this transfer to a member of his family, the grantor avoids the prohibitive valuation rules applicable to GRITs (discussed elsewhere on this website) which would value the gift at the full $1 million.

If the grantor survives the term of the trust (10 years in the example above), the trust terminates, the trust corpus, including appreciation, passes to the son free of further transfer tax, and the value of the trust assets will not be included in the grantor's gross estate. If, however, the grantor fails to survive the term of the trust, the trust assets will be included in his gross estate at date of death fair market value, but still pass to the son. If the grantor dies within three years of establishing the trust, any gift tax paid on the taxable transfer to the remainderman will also be included in the grantor's gross estate. If the grantor fails to survive the trust term, the GRUT will have provided little tax benefit. If the grantor survives the trust term, however, the GRUT can transfer considerable accumulated wealth and all future appreciation during the trust term to family remaindermen at significantly reduced transfer tax cost.

Passing assets to beneficiaries through a trust such as this removes those assets from the grantor's probate estate which should reduce costs of administering the grantor's estate, and provides a measure of confidentiality since a trust is generally not a public document as is a will.

GRUTs are not for every estate plan. They may be a good choice for wealth transfers within a family, however. They are but another tool to fill a specified need. GRUTs should be drafted only by well qualified estate planning attorneys.

©2011 Ronnie C. McClure, PhD, CPA