There are a variety of methods that you can consider when trying to pass assets along to your next generation. When planning your estate in Atlanta, you’ll want to consider all the options available to you. Two different tools that you can consider include a grantor retained annuity trust (GRAT); and an intentionally defective grantor trust (IDGT). Both of these tools for estate planning in Atlanta come with pros and cons, and both can also be used to freeze (or secure) any assets, and their value, that you wish to consider transferring.
So how do they both work? Here’s a quick dive into each one to help you better understand.
GRAT Grantor Retained Annuity Trust
What is a GRAT? Also called an irrevocable trust, a grantor retained annuity trust lets you transfer your assets directly to the trust while giving you the option to receive an annuity payment (set over a prespecified duration). The catch here is that you can’t revoke this trust; so once you have set the trust up, you won’t be able to add anything else to it that you didn’t initially want to protect. Once the terms of the trust have expired, any remaining assets within the trust are distributed to the beneficiaries that you’ve assigned. This method allows you to pass on a large portion of your wealth while helping you also avoid most of the gift tax liabilities.
Another reason a GRAT is helpful for estate planning in Atlanta is because wealth tax can be substantial after your passing; and a GRAT can help reduce any of these liabilities by allowing you to freeze the value of your estate while letting you also transfer portions to your heirs. What’s more, any appreciation of a GRAT can be transferred over to the hiers of your estate without taxation. The money that your heirs receive from appreciation don’t count against estate and gift tax exemptions, and the assets contained within the trust only increase when they grow at a faster pace than the interest rate on the annuity.
IDGT (Intentionally Defective Grantor Trust)
Another option that you can consider when planning an estate in Atlanta is called an intentionally defective grantor trust (IDGT). While these types of trusts are more complex in nature than GRATs are, they are not without their advantages, either.
What is an IDGT? An IDGT is another type of irrevocable trust that is used to plan for estate taxes. It works by adding assets, cash or gifts to the trust, which are then retained by the trust to be later passed onto your heirs.
As the grantor of the trust, you have more control. For example, you have the option to switch out assets (of similar value), and you can even borrow from the trust without the typical collateral, security or interest required. However, you are considered the owner of the trust as it relates to income taxes.
An IDGT lets you sell assets to the trust, including appreciated assets, for a promissory note, and all of this can be done without interest accruing. Any realized growth on the trust in excess of the interest rate can be passed onto your heirs without gift tax. Furthermore, the assets of the trust are not considered a portion of your estate, but any outstanding balances are. This type of trust may offer certain tax advantages because it can enable you to offer tax-free gifts paid out of the trust to your heirs.
It’s of importance to note that there can be tax consequences on a GRAT and an IDGT if you pass away before paying off the note. Because of the complexity of both of these types of estate planning tools, it’s imperative that you seek counsel from a specialist.
Your estate planning attorney in Atlanta can help you determine which of these trusts is best suited to your specific situation. As your asset protection law firm, The Atlanta Estate Center can help you best plan for the future while helping you maximize your asset protection, so you can pass as much of your wealth onto your heirs as possible.
Give us a call to discuss your options today at: (770) 212-2181.
