Grantor Retained Unitrusts, or GRUTs, are specifically designed as irrevocable trusts, a critical distinction that defines their estate planning function and tax benefits.
What Happens If I Try to Change My GRUT?
The irrevocability of a GRUT isn’t simply a legal technicality; it’s the cornerstone of its tax advantages. If a grantor retains the power to revoke or alter the trust’s terms, the IRS will likely consider the assets within the GRUT as still being part of the grantor’s estate for estate tax purposes, negating the intended benefits. The entire premise of a GRUT hinges on relinquishing control. This means once established, you generally cannot take back assets, change beneficiaries, or alter the trust’s payout structure. However, some limited amendments may be permissible if they don’t affect the grantor’s retained interest or the trust’s overall validity. For example, clarifying administrative details is often acceptable.
How Does Irrevocability Impact Estate Taxes?
By transferring assets into an irrevocable GRUT, you’re essentially removing them from your taxable estate. This can be particularly effective if your estate is projected to exceed the federal estate tax exemption (currently $13.61 million in 2024, but subject to change). The assets within the GRUT are no longer subject to estate taxes upon your death. However, you, as the grantor, retain a unitrust interest—the right to receive a fixed percentage of the trust’s assets annually for a specified term. This retained interest *is* included in your taxable estate, but the goal is to structure the trust so that the value of the retained interest is significantly less than the total value of the assets transferred.
What About Trying to “Undo” a GRUT After I’ve Created It?
Let’s consider a situation with a client, James. He established a GRUT intending to transfer a substantial portfolio of rental properties. A year later, his financial circumstances changed dramatically due to an unexpected market downturn. He desperately wanted to regain access to the properties, believing he could stabilize them better himself. Unfortunately, the irrevocability of the trust meant James had limited options. He couldn’t simply take the properties back. He could petition the court to modify the trust, but that would only be granted under exceptional circumstances—typically a demonstrable change in the law or unforeseen circumstances that defeat the original purpose of the trust. James’ situation didn’t meet that standard, and he was left to abide by the terms of the trust.
How Can I Benefit from a Properly Structured GRUT?
Now, let’s look at Sarah, who meticulously planned her estate with a GRUT. She transferred a large block of stock into the trust, retaining a 5% unitrust interest for 15 years. Her estate was projected to be over the estate tax exemption. By structuring the GRUT correctly, she significantly reduced her estate tax liability. The stock continued to appreciate within the trust, and those gains were not subject to estate tax upon her death. The annual unitrust payments provided her with income during retirement, and the remaining assets passed to her children free of estate tax. This example showcases the power of a well-executed GRUT. A GRUT can provide income during your lifetime, reduce estate taxes, and provide for your heirs.
“The key to a successful GRUT isn’t just creating the trust; it’s understanding the implications of irrevocability and carefully planning for the future.”
What are the Risks of a GRUT?
While GRUTs offer substantial benefits, it’s crucial to understand the risks. The most significant risk is losing access to the assets transferred into the trust. Once the assets are in the GRUT, you generally cannot take them back. There’s also the risk that the retained unitrust interest may not provide sufficient income during retirement, particularly if the assets within the trust perform poorly. Furthermore, if the assets appreciate significantly, the value of the retained interest may become substantial, bringing it back into your taxable estate. Properly modeling different scenarios and seeking professional advice are essential.
765 N Main St #124, Corona, CA 92878If you are considering a GRUT or have questions about estate planning, it’s crucial to consult with an experienced estate planning attorney. Steven F. Bliss ESQ. at Corona Probate Law can provide personalized guidance and help you create an estate plan that meets your specific needs and goals.
You can reach Steven F. Bliss ESQ. at (951) 582-3800.