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Understanding grantor retained annuity trusts in Maryland

On Behalf of | Jul 6, 2022 | Estate Planning, Trusts |

Many people in Maryland create trusts to ease the transfer of assets to their loved ones and also to reduce some taxes. While there are many types of trust you can create to achieve the same purpose, the one that has been gaining popularity of late is the grantor retained annuity trust.

GRAT defined

A grantor retained annuity trust is an irrevocable trust in which the grantor, or creator of the trust, gives up ownership of certain assets to the trustee. In return, the grantor receives fixed payments for a set period of time. After that time expires, the remaining assets in the trust are distributed to the beneficiaries named by the grantor.

How GRATs work in Maryland

The grantor of a GRAT in Maryland must be at least 21 years old and cannot be the trustee of the trust. The trustee can be anyone the grantor entrusts to manage the assets, including a family member, friend, or professional fiduciary.

The grantor must also transfer ownership of the assets to the trust. This can be done by deed, will, or any other legal estate planning means. The grantor must then hire a qualified appraiser to value the assets for tax purposes.

Once the asset is transferred and valued, the grantor and trustee will sign an agreement outlining the terms of the trust. For instance, how much money the grantor will receive each year and for how long. It also includes what will happen to the assets after the grantor’s payments end.

Tax benefits of GRAT

There are two ways in which grantor retained annuity trusts are taxed: first when the assets are transferred to the trust and then again when they are distributed to the beneficiaries. However, the IRS has a rule called the “section 7520 rate.” This is the interest rate used to value GRATs for tax purposes. The current section 7520 rate is low, which means that GRATs can be structured in a way that minimizes or even eliminates estate taxes.

A grantor retained annuity trust is a powerful estate planning tool one could adopt. However, they are best for assets that can appreciate in time.