Ways and means committee
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While the annuity payments will be included in the grantor's estate, the appreciation of the assets during the term of the GRAT will pass to the continuing trust tax-free. The annuity payments are structured so that the value of the remainder is zero or close to zero, which results in the initial transfer to the trust being nontaxable. Under a typical GRAT, the grantor will receive an annuity for a term of years and the remainder will be distributed to a continuing trust, usually for the benefit of the grantor's descendants.
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GRATs are used to transfer appreciated assets without incurring gift and estate taxes. Under the current rules, there are several commonly used estate planning structures that rely upon the grantor trust rules, including grantor retained annuity trusts (GRATs), spousal lifetime access trusts (SLATs), intentionally defective grantor trusts (IDGTs) and irrevocable life insurance trusts (ILITs). Additionally, the grantor trust rules allow the grantor to retain some control over an irrevocable trust, such as the carefully limited ability to change the trust's assets and beneficiaries. Grantor trusts, the income of which is taxed to the grantor instead of the trust, have been an important estate planning tool since income tax brackets for trusts became more compressed than those for individuals. These potential changes could make year-end planning especially important this year. Among the many changes in this proposed tax plan are three that will significantly impact estate planning opportunities: 1) changes to the grantor trust rules, 2) elimination of valuation discounts for interests in passive entities, and 3) reduction in the gift and estate tax exemption. The House Committee on Ways and Means has proposed a tax plan intended to fund President Joe Biden's "Build Back Better" $3.5 trillion infrastructure program.