Using a GRAT or GRUT to shift appreciation and maintain control of the corporation.

This case study focuses on the use of grantor retained annuity trusts (GRATs) and grantor retained unitrusts (GRUTs) to transfer stock in closely held corporations while minimizing gift tax consequences and maintaining control. Under Internal Revenue Code Section 2702, retained interests in trusts are generally valued at zero for gift tax purposes, but exceptions exist for qualified interests such as those in GRATs and GRUTs, allowing the taxable gift to be reduced by the value of the retained annuity or unitrust interest. GRATs provide fixed annual payments for a term, effectively “freezing” the value of transferred stock for estate tax purposes, while GRUTs pay a fixed percentage of the trust’s annually revalued assets, which may result in different tax outcomes depending on asset appreciation and the grantor’s objectives. The choice between a GRAT and a GRUT depends on factors including expected asset growth, desired certainty of payments, and whether additional contributions to the trust are planned. Both trusts require the grantor to survive the trust term to realize estate tax benefits, and recent IRS guidance limits certain basis adjustments for assets in intentionally defective grantor trusts. [Extracted from the article]