By: Martin M. Shenkman, CPA, MBA, JD
A "GRUT" is a Grantor Retained Uni-Trust. It is similar to a GRAT (defined elsewhere but we'll explain it here to!) but the payment is based on a percentage of the value of the assets held in the trust each year, not a fixed dollar figure. A GRUT is similar in concept to a charitable remainder uni-trust ("CRUT"). Except in a CRUT the remainder interest (what is left after your or other named individuals receive payments) goes to chairty, whereas in a GRAT or GRUT the remainder interest (what is left after you receive an annuity or uni-trust payment, respetively) goes to your heirs (children, partner, etc.). If you used a GRUT you would contribute property to a trust you established. The trust would be taxed as a grantor trust (all income reported on your personal income tax return). The trust would pay you a fixed percentage (it can vary within statutory limits) each year (or more frequently) based on the value of the asset. So if you contributed a $1 million asset to a GRUT structured to pay you 5%, you would receive $50,000 in the first year. If the value of the assets doubled to $2 million in the next year, your 5% uni-trust interest would require that you get a $100,000 payment. At the end of the GRUT term the assets would be transferred either outright or in further trust to te people you specified in the trust document. The problem with a GRUT is that the goal of this technique is to remove assets from your estate in a tax advantage manner, yet the increasing percentage payout each year if the assets you transferred appreciated, would result in more of the assets value being paid back to you. This, sometimes called "leakage", is why this technique is not really used to any significant degree. Understanding this concept will help you better utilize GRUT and other planning.
Subscribe to our email list to receive information on consumer webcasts and blogs, for practical legal information in simple English, delivered to your inbox. For more professional driven information, please visit Shenkman Law to subscribe.