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Grantor Retained Unitrust (GRUT)

July 20, 2011

John Jastremski Presents:

Grantor Retained Unitrust (GRUT)

Definition

A grantor retained unitrust (GRUT) is an irrevocable trust into which a grantor makes a one-time transfer of property, and in which the grantor retains the right to receive a variable amount of principal and interest (based on a fixed percentage) at least annually for a specified term of years. At the end of the retained interest period or upon the death of the grantor, whichever is earlier, the property remaining in the trust passes to the remainder beneficiaries or remains in trust for their benefit.

A transfer of property to an irrevocable trust is a taxable gift. The value of the gift on which gift tax is imposed is generally its fair market value. However, because the grantor retains an interest in a GRUT, the value of the transfer is discounted; gift tax is imposed only on the remainder interest (and any gift tax due may be sheltered by the grantor’s lifetime gift and estate tax exemption–$5 million in 2011).

This taxable value is calculated using an interest rate provided by the IRS (known as the discount rate or Section 7520 rate), which is based on current interest rates and changes monthly. This interest rate assumes the GRUT property will earn a certain rate of return during the annuity period. Any actual return that exceeds the assumed return passes to the remainder beneficiaries gift and estate tax free. Investment performance, therefore, is central to this strategy.

A GRUT is the same type of trust as a grantor retained annuity trust (GRAT), except that with a GRAT, the grantor receives a fixed annuity amount rather than a variable unitrust payment. Because of this, the grantor of a GRUT receives more income than with a GRAT, reducing the potential for tax savings. And, because the unitrust payment must be recalculated each year, the cost to administer a GRUT may be greater than with a GRAT. Another important difference between these two trusts is that unlike a GRAT, a GRUT can’t be zeroed out, and therefore a taxable gift always results.

For a GRUT to be successful:
• The grantor must outlive the term of years
• The GRUT property must outperform the Section 7520 rate
• The GRUT document must be properly drafted

Potential tax advantages of a GRUT include:
• Because of the retained interest, the value of the transfer for federal gift tax purposes may be discounted
• Principal remaining in the GRUT at the end of the term of years is removed from the grantor’s gross estate for federal estate tax purposes
• Interest (i.e., appreciation and/or earnings) remaining in the GRUT at the end of the term of years passes to the remainder beneficiaries federal gift tax free

Key Tradeoffs
• If the GRUT property underperforms the Section 7520 rate, there is no excess and no tax savings is achieved (and if the GRUT is depleted, no property is transferred to the remainder beneficiaries)
• If the GRUT property underperforms the Section 7520 rate, gift taxes paid and/or any applicable exclusion amount used will be wasted (though the amounts would be minimal)
• If the grantor does not outlive the term of years, any property remaining in the GRUT is includable in the grantor’s gross estate for federal estate tax purposes
• If the GRUT is unsuccessful, any costs incurred to create and maintain the GRUT will be wasted

How Is It Implemented?
• Hire an experienced attorney to draft the GRUT document
• Have property that is transferred to the GRUT professionally appraised
• Transfer property to GRUT (i.e., retitle assets)
• File gift tax returns

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of John Jastremski, Jeremy Keating, Erik J Larsen, Frank Esposito, Patrick Ray, Robert Welsch, Michael Reese, Brent Wolf, Andy Starostecki and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, AT&T, Qwest, Chevron, Hughes, Northrop Grumman, Raytheon, ExxonMobil, Glaxosmithkline, Merck, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

John Jastremski is a Representative with FSC Securities and may be reached at http://www.theretirementgroup.com.

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