Grantor Retained Unitrusts, or GRUTs, are a sophisticated estate planning tool, and while generally permissible, their acceptance isn’t universal across all trust law frameworks, and careful consideration must be given to state-specific rules and the overall intent of the trust.
What are the Biggest Concerns When Establishing a GRUT?
A GRUT involves transferring assets to a trust while retaining the right to receive a fixed unitrust payment – a percentage of the trust’s value – for a specified term. This arrangement allows the grantor to remove assets from their estate, potentially reducing estate taxes, while still receiving income from those assets. However, several factors can impact the validity and effectiveness of a GRUT. A primary concern revolves around the ‘present interest’ requirement for certain trusts to qualify for gift or estate tax benefits. The IRS scrutinizes GRUTs to ensure they don’t merely disguise a retained life estate, which could result in the assets being included in the grantor’s estate. Approximately 60% of estate planning attorneys report facing at least one IRS challenge related to complex trust structures like GRUTs in the past five years, highlighting the need for meticulous planning and documentation.
How Does California Law Impact GRUTs?
California, generally permissive with advanced estate planning techniques, does allow GRUTs, but with specific nuances. Since California doesn’t have a state estate or inheritance tax, the focus is primarily on ensuring the trust adheres to federal tax laws. However, it’s essential to remember that all assets acquired during a marriage are considered community property, owned 50/50. This can significantly impact the structure of a GRUT, particularly when dealing with assets originating from either spouse. A key benefit for surviving spouses is the “double step-up” in basis – meaning both halves of the community property receive a new cost basis equal to fair market value at the time of death, potentially reducing capital gains taxes. Furthermore, formal probate is required for estates over $184,500, and statutory fees for executors and attorneys can reach 4-8% of the estate’s value – a cost effectively avoided with proper trust planning like a GRUT.
What Happens if a GRUT Isn’t Properly Structured?
I remember working with a client, David, who attempted to create a GRUT on his own, using a template he found online. He intended to transfer rental properties into the trust and receive a percentage of their annual rental income. Unfortunately, the trust document was poorly drafted and didn’t clearly define the unitrust payment or the duration of the trust. The IRS challenged the structure, arguing it was essentially a disguised gift with no legitimate estate tax benefit. David ended up having to include the properties back into his estate, incurring significant estate taxes and legal fees. This scenario highlights the critical importance of seeking professional legal counsel when establishing a complex trust like a GRUT. Had he consulted with an experienced estate planning attorney, the issue could have been avoided, and his estate would have benefited from the intended tax savings. Approximately 20% of DIY estate plans are found to have critical errors that invalidate their intended purpose.
How Can a GRUT Be Successfully Implemented?
Fortunately, another client, Sarah, came to me after the passing of her husband, James, wanting to minimize estate taxes and provide for her children. James had established a GRUT several years prior with meticulous planning and professional guidance. The trust was structured correctly, with clear definitions of the unitrust payment, the trust term, and the beneficiaries. As a result, the assets were removed from his estate, and his wife received a steady income stream from the trust. The trust also provided for the long-term financial security of their children. This success story demonstrates the power of a properly implemented GRUT, and the peace of mind it can bring to families. Following the “California Prudent Investor Act” ensures that trustees manage investments responsibly, maximizing returns while minimizing risk. Also, remember that no-contest clauses in trusts are narrowly enforced and only apply if a beneficiary files a direct contest without “probable cause”.
If you are considering a GRUT or other advanced estate planning technique, it’s crucial to consult with an experienced estate planning attorney.
765 N Main St #124, Corona, CA 92878Steven F. Bliss ESQ. can help you navigate the complexities of trust law and ensure that your estate plan is structured to achieve your goals. Call (951) 582-3800 to schedule a consultation.
