A person creates a Grantor Retained Annuity Trust (GRAT) by transferring assets to an irrevocable trust for the benefit of a beneficiary and retains an annuity interest.
A person who establishes a GRAT receives an annuity for a set term, as little as two years. Any balance remaining after the annuity is paid goes to whomever the grantor named as a beneficiary when the trust was established, typically a family member. The value of the remainder interest is a taxable gift when the GRAT is created.
However, the GRAT can be structured in a manner such that the present value of the annuity the grantor receives is equal to the value of the assets placed into the trust, so the gift tax value of the remainder is zero.
