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IRC Sec. 2702 - GRITs (including Personal Residence Trusts and QPRTs), GRATs and GRUTs (Summary)

GRITs, GRATs, and GRUTs Primer

January 1999

Summary

This primer addresses the three principal forms of trust which are currently used to discount the value of a gift for transfer tax purposes through the grantor's retention of term and reversionary interests in the trust. These are, first, the grantor retained income trust, or "GRIT," which exists in two forms: (1) its pre- IRC 2702 or "common law" form which can be used, and is not subject to IRC Sec. 2702, if the remaindermen are not "members of the grantor's family," as defined in IRC Sec. 2702(e) by reference to IRC Sec. 2704(c)(2), and (2) the personal residence trust or qualified personal residence trust (referred to as a "QPRT") which also are not subject to IRC Sec. 2702 because of IRC Sec. 2702(a)(3)(A)(ii). In addition, there are the two trusts "approved" by Sec. 2702, the grantor retained annuity trust, or "GRAT," in which the grantor retains a qualified annuity interest pursuant to IRC Sec. 2702(b)(1), and the grantor retained unitrust, or "GRUT," in which the grantor retains a qualified unitrust interest pursuant to IRC Sec. 2702(b)(2).

The grantor retains an interest in a common law GRIT, personal residence trust, QPRT, GRAT or GRUT for a fixed term of years or until his earlier death. A taxable gift is made as to part of the value of the trust property, and if the grantor survives the fixed term, the entire value of such property escapes estate tax in the grantor's estate. Thus, the transaction is leveraged in the sense the gift removes a larger amount from the grantor's gross estate for estate tax purposes.

The memorandum is 89 pages in length.

Please contact Stephen F. Lappert (lappert@clm.com) to request a copy of the GRITs, GRATs, and GRUTs Primer.


Footnote

1. This outline draws extensively on materials prepared by Richard B. Covey, Esq., of Carter, Ledyard & Milburn. His permission to use those materials and his assistance with various questions are gratefully acknowledged. I am also grateful to Jerome J. Caulfield, Esq., of Carter, Ledyard & Milburn for permission to use the charts which appear in Appendix F and for his help with various computations referred to in the text.


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