If you have high-value assets that are likely to grow in worth, such as real estate, a business, or investments, you may be concerned about the tax impact when passing them to the next generation. In Pittsburgh, we help clients use Grantor Retained Annuity Trusts (GRATs) and Qualified Personal Residence Trusts (QPRTs) to reduce gift and estate taxes while transferring more wealth to heirs.
What Is a GRAT?
A Grantor Retained Annuity Trust is an irrevocable trust where you transfer appreciating assets and retain the right to receive fixed annual payments for a set number of years. At the end of the term, the remaining assets go to your beneficiaries.
Why it works:
- The taxable gift is calculated using the IRS’s interest rate, often lower than the asset’s actual growth rate.
- Any appreciation above that rate passes to beneficiaries without additional gift or estate tax.
- Ideal for assets like stocks, business interests, or investment properties.
What Is a QPRT?
A Qualified Personal Residence Trust is designed specifically for transferring a home or vacation property. You deed the property into the trust but keep the right to live in it for a set period. When the term ends, the property belongs to your beneficiaries.
Why it works:
- The gift value is reduced because you retain the right to live in the property during the trust term.
- The longer the term, the lower the taxable value.
- Removes future appreciation from your taxable estate.
How to Choose Between a GRAT and a QPRT
While both tools can reduce taxes, the best fit depends on the type of asset and your future plans:
- Choose a GRAT if you want to transfer high-growth investments or a business interest while minimizing gift taxes. Best if you expect significant near-term appreciation.
- Choose a QPRT if your goal is to pass on a primary or vacation home while locking in a lower taxable value and still using the property for years.
For example, a business owner expecting substantial company growth might use a GRAT to pass on future appreciation without gift tax exposure. In contrast, a family with a valuable lake house could use a QPRT to transfer it to children while continuing to enjoy it each summer.
Tax Advantages of GRATs and QPRTs
GRAT Tax Benefits:
- Low IRS interest rates mean more appreciation passes tax-free.
- Many GRATs are set up as “zeroed-out” GRATs, meaning they’re structured so the taxable value of the gift is reduced to almost nothing. In practice, this lets you transfer future growth in the asset’s value to your beneficiaries with little or no gift tax liability.
QPRT Tax Benefits:
- The retained right to live in the home reduces the gift value.
- Removes future appreciation from the taxable estate once the term ends.
Setting Up a GRAT or QPRT
GRAT steps:
- Select appreciating assets for transfer. This could include shares in a family business, a portfolio of growth stocks, or real estate you expect to rise in value.
- Determine the annuity amount and term. Annuity payments should balance income needs with your goal of transferring appreciation.
- Fund the trust and receive annuity payments. During the term, you continue to benefit from the annuity while the remaining growth builds for your beneficiaries.
QPRT steps:
- Choose your primary or vacation residence. The property should have strong potential for appreciation.
- Set the number of years you will retain use. A longer term generally results in a lower taxable gift value.
- Transfer ownership into the trust. You maintain the right to live in the home during the term, and after it ends, the property passes to your beneficiaries.
FAQs About GRATs and QPRTs
Can I put rental property into a GRAT?
Yes, you can place rental property in a GRAT, especially if it’s likely to appreciate. The rental income may help fund the annuity payments you receive during the trust term.
What happens if I outlive a QPRT?
If you outlive the trust term, the property passes to your beneficiaries as planned and is removed from your taxable estate. You may be able to rent it back from them at fair market value if you wish to continue living there.
What happens if I die during a GRAT or QPRT term?
If you pass away during the term, the remaining value of the trust assets may be included in your taxable estate. Proper structuring and planning can help reduce this risk.
Can these trusts be changed after they are created?
No. GRATs and QPRTs are irrevocable. Once set up, you cannot change the terms or take assets back, so careful planning is important.
Let’s Build Your Advanced Estate Plan Together
GRATs and QPRTs can help you reduce taxes and pass more of your wealth to future generations. At Jones, Gregg, Creehan & Gerace, we will work with you to choose the trust that fits your goals and ensure it is set up correctly. Contact us today to start planning.