This is another interesting and unusual trust type for you – the GRAT! Grantor Retained Annuity Trusts provide a fantastic example of the flexibility of trusts as estate and legacy planning tools. Although the Revocable Living Trust (RLT) is still the most common trust in the context of estate and legacy planning, GRATs demonstrate the variety of options in an estate planning attorney’s toolbox.

This trust is based around clever application of IRS “hurdle rates.” The fundamental idea is to place assets into the trust that will exceed the hurdle rate in terms of appreciation– the big question is, will the asset appreciation beat the hurdle rate? The grantor (person who placed the assets into the trust) will receive an annuity based on the assets in the trust; ideally, at the end of the trust’s duration the annuity payouts will have equaled the value of the property placed into the trust at its creation. If everything has been properly balanced, property remaining in the GRAT at the end of this term may be distributed to family members without incurring gift tax penalties. However, bear in mind that appreciation of the assets in the GRAT must exceed the hurdle rate in order for this tool to be effective.

What kinds of assets are often placed into a GRAT? The most common example are shares in a business that are expected to appreciate significantly. You might also consider that this tool typically works best in the context of a low hurdle rate. High hurdle rates = more risk, as the asset has a higher rate to “beat.”

So why are revocable living trusts still the most common trust in an estate and legacy planning context? RLTs are simple, reliable, and effective when used and funded correctly. GRATs are used for narrower purposes, as opposed to the general applicability of the revocable living trust. I hope this has demonstrated one of the interesting and unusual tools at the disposal of an estate planning attorney.

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