Taxable Gift Interests in Common Trust Designs

GRAT and GRUT payment terms

A GRAT gives its grantor a fixed annuity payment during a fixed trust term, then passes remaining principal to others. The grantor contributes assets in exchange for annual payments based on the property's original fair market value. At the end of the specified period, remaining assets pass to beneficiaries named in the trust, outright or in trust.^[1]

A GRUT uses the same general retained payment term, but the annual amount is calculated differently. For a GRAT, the annual payment is calculated when the trust is funded and remains fixed. For a GRUT, the annual payment is a percentage of the trust's value, recalculated annually. For both structures, the taxable gift is the remainder interest, which is the value left for beneficiaries after the payment term.^[5]

GRATs and GRUTs typically hold income-producing property, while a QPRT holds a residence. In each design the grantor keeps a payment interest for a set term, and the remainder interest goes to others. If the grantor survives the term, the property passes to the chosen beneficiaries.^[5]

A GRAT is irrevocable, and the grantor's children are common remainder beneficiaries.^[6]

QPRT remainder at the term's end

A QPRT lets its grantor retain the right to use a residence for a fixed number of years, then the property passes to beneficiaries under the trust terms. The beneficiaries may own the residence outright or in trust. The gift is taxed at funding, measured by the discounted actuarial value of the remainder interest, which can be substantially less than the property's full fair market value. Nothing further is taxed as a gift when the term ends.^[5]

After the term, the residence can stay in a continuing trust that gives the grantor's spouse a lifetime interest. The QPRT's remainder is the interest that passes at the end of the retained use period.^[5]

Trusts with spouse or beneficiary roles

A SLAT is an irrevocable discretionary trust that one spouse funds for the other spouse and possibly descendants. Beneficiaries in younger generations may be included alongside the other spouse.

A QTIP trust provides financial support to a surviving spouse while allowing the grantor to retain control over the distribution of trust assets after that spouse dies.

A qualified domestic trust is a federal marital deduction trust for a surviving spouse who is not a U.S. citizen. Without a qualified domestic trust, transfers at death to a spouse who is not a U.S. citizen do not qualify for the unlimited marital deduction available for a U.S. citizen spouse.

Questions and answers

Related resources

Related glossary terms

• Charitable trust: A charitable trust holds property for charitable purposes, and trust laws relate it to purpose trusts and to the other categories of trust used in planning.
• Trust: The Hague Convention describes a trust as a relationship in which a settlor places assets under a trustee's control for beneficiaries or a specified purpose.

Related articles and guides

• When Trust Transfers Are Completed Gifts: How dominion and control, reserved powers, and retained use, enjoyment, or income relate to completed gifts and estate inclusion for a U.S. citizen's trust.

Tools and official documents

• Form 709: federal gift and GST tax return: Form 709 is the federal gift tax return, also used for generation-skipping transfers: reportable gifts, definitions, documents, related forms and filing.

Related pages

• Topic guides
• GST Rules for Trust Changes and QPRTs
• Foreign Grantor Trust Rules for Non-U.S. Grantors
• How Discretionary Trusts Allocate Benefits
• Income tax ownership and transfer taxes