The Grantor Retained Annuity Trust is an estate planning tool that decreases the tax liability that occurs when a there is an inter-generational transfer of assets. By using such plans it is possible to create a temporary irrevocable trust; when the trust expires, the beneficiary gets a tax free disbursement.
The goal of a GRAT is to reduce the tax burden associated with an estate or gift. The grantor who sets up the trust transfers assets into the trust. The trust is designed to provide a steady stream of income to the grantor over a specified period. After that time has elapsed the remaining funds are passed to a beneficiary.
Every time a GRAT is set up a grantor, trustee and beneficiary must be named. The grantor funds the trust, the trustee manages the assets and, if the conditions of the trust are met, the beneficiary collects the assets at the end of the predetermined period. One of those conditions is that the beneficiary must be a family member of the grantor. Additionally, since this is a form of irrevocable trust, the grantor is removing assets from their estate so that no taxes will be due on them.
The reason that GRATs are popular as estate planning tools is that they allow the grantor to reduce the size of their estate. It also provides the grantor with a regular source of income while the annuity is being paid out. If the grantor dies before all the annuity payments are made then the balance of the trust automatically transfers to the beneficiary.