Mark W. Petro's Profile Picture
Mark W Petro

Family Business Succession Planning

A grantor retained unitrust allows a discount for the value of the property transferred to the trust, while removing the property from the grantor's gross estate.


Grantor Retained Unitrust (GRUT)


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 (based on a fixed percentage of trust assets valued annually) at least annually for a specified term of years. At the end of the retained unitrust period, 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 federal gift and estate 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; transfer tax is imposed only on the remainder interest.

Note:  Any transfer tax due may be sheltered by the grantor's lifetime gift and estate tax applicable exclusion amount ($13,610,000 in 2024, $12,920,000 in 2023).

This taxable value is calculated based on the value of the property transferred to the GRUT, the unitrust payout rate, the term of the trust, and 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. However, unlike with a GRAT, the Section 7520 rate has little or no effect on the value of the remainder interest in a GRUT.

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, payments to the grantor of a GRUT may increase or decrease each year depending on the value of the trust assets. 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 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 and estate 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 gift and estate tax purposes
  • While not a tax advantage, if the value of the trust property increases, payments to the grantor increase, possibly providing protection against inflation

Key tradeoffs

  • If the GRUT property performs poorly or is depleted, there may be less than anticipated transferred to the remainder beneficiaries and little or no tax savings and gift taxes paid and/or any applicable exclusion amount used may be wasted
  • 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 gift and estate tax purposes
  • If the GRUT is unsuccessful, any costs incurred to create and maintain the GRUT will be wasted
  • If the value of the trust property decreases, payments to the grantor decrease, and may not provide enough income
  • If payments to the grantor increase because the value of the trust property increases, the additional payments will be included in the grantor's gross estate for federal estate tax purposes unless consumed or given away

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 return(s)

Investments and advisory services are offered through Lakeland Investor Services, Inc., a Registered Investment Advisor. 11873 Oakland Beach Road, Conneaut Lake, PA 16316, (814) 382-6681. Insurance services offered through Lakeland Insurance Services, LLC and Mark W. Petro, an agent licensed in PA, FL, MI, NJ, OH and VA. Neither Lakeland Investor Services, Inc. nor its agents and representatives can provide tax, legal or accounting advice. Clients should consult their own attorney or tax advisor about their specific circumstances.

This communication is strictly intended for individuals residing in the state(s) of FL, NJ, OH, PA and VA. No offers may be made or accepted from any resident outside the specific states referenced.
Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2024.