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A grantor retained annuity trust (GRAT) and grantor retained unitrust (GRUT) may be utilized to increase the benefit of gifts made to those in other generations. Typically, the donor makes a current gift to his children of the right to the trust assets at a specific date in the future and the donor retains the right, for a term of years, to receive the annuity or unitrust payments from the trust. If the donor survives the term of the trust, significant tax as well as other transfer cost reductions may be realized. For example, the assets in the trust may be excluded from the value of the donor's estate.
Another type of grantor retained interest is a Qualified Personal Residence Trust (QPRT). Generally, a donor transfers an interest in his personal residence to an irrevocable trust in which he retains the right to use the property for residential purposes for a term of years. After the term of years expires, the residence passes to the remaindermen of the trust, typically a child or children. If the donor survives the trust's term, the residence may not be included in the value of his or her estate.
Each of these techniques often takes advantage of the credit available during an individual's lifetime. The value of the gift is equal to the value of remainder interest. For example, a $1,000,000 house placed in a QPRT for 15 years by a parent age 65, assuming a 6% interest rate, will cause the donor to be treated as making a $247,070 gift. But no immediate tax would be due, since this is less than the credit exemption equivalent of $1,000,000 (in 2002).
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