A trusts and estates attorney in Sanford NC can explain the possibility of using more complex types of trusts. One such trust that a trusts and estates attorney in Sanford NC may recommend is that of a grantor retained annuity trust.
A grantor retained annuity trust is a special type of trust that allows the grantor to receive income from the tax while minimizing tax liability. The grantor receives annuity payments from the trust for the number of years specified in the trust. This income is derived from the interest from the assets that comprise the trust.
A grantor retained annuity trust is not for everyone. It makes the most sense to use this type of trust when the grantor’s estate would exceed the federal exclusion amount. This type of trust serves as a freeze transaction and is optimized in a low interest rate environment. The value of the gift is ultimately reduced to that of the remainder interest after the annuity income transfers.
The grantor pays the income tax that is generated from the income of the trust, similarly as if the asset would be in the name of the grantor. Therefore, the beneficiary does not have to pay any income tax for the gift. There are certain ways to maximize the use of this type of trust as a wealth transfer tool. This includes incorporating rapid appreciation during the term of the trust, optimizing gift tax valuation discounts and using cascading grantor retained annuity trusts or sequential trusts. This is accomplished when a person establishes an initial trust for a certain term. When the income is received from this trust, a second trust is established with those funds. Then, the income from both trusts are established to form a third trust. In this manner, both the assets and the income may eventually be transferred to heirs without gift tax implications.