As an approach to reduce current income taxes, transfer wealth to family free of gift and estate taxes, and support charitable organizations with regular contributions, Charitable Lead.
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Grantor Retained Annuity Trust (GRAT)
When you create a Grantor Retained Annuity Trust (GRAT), the grantor will receive a stream of income, at least annually, for the term of the trust. The payout is based on the present value of assets using the effective AFR Rate. As a result of this payout requirement, there is often little to no estate tax exemption used when you fund a GRAT.
As interest rates get lower, the required payout also gets lower. When interest rates are low, it is easier for the growth and income generated by assets in the trust to be greater than the required payouts, leaving more assets inside the trust at the end of the day. When the trust terminates, anything left in the trust is transferred to the remainder beneficiary often children or trusts set up for the benefit of children.