October 2, 2000

Tax Tid-Bits
Don't Forget the GRITs

Grantor retained income trusts (GRITs) can provide amazing gift tax savings when leveraged with assets that do not produce much income. The only catch is that the beneficiary of a GRIT cannot be a "family member." But for this purpose, the term "family member" includes children, parents, brothers, and sisters. So, if you wish to transfer assets to nieces, nephews, or other non-"family members," you may want to consider using a GRIT.

Here’s how a GRIT works:

1. The grantor creates an irrevocable trust and transfers assets (preferably low-income-producing assets) to it. The trust is to pay all income to the grantor for a specified term of years, then usually pays the assets to the beneficiaries.
2. The grantor incurs federal gift tax on the value of the assets minus the value of the income interest, based on the interest rate determined by the IRS (7.4% in October 2000). Also, the value of the gift is reduced depending on the length of the term and on the age of the grantor. (If the grantor does not survive the term, the assets are returned to the grantor’s estate.) The older the grantor and the longer the term, the smaller the gift.
3. During the term, the trust pays its income to the grantor, but if the trustee invests in growth stocks (for example), which do not provide much in dividends, the assets could appreciate at a more dramatic rate than the 7.4% determined by the IRS (12% for instance).