[45강 GRAT] 내 자산을 ✅전략적으로 절세하며 증여하는 방법? GRAT을 활용하자! Grantor Retained Annuity Trust - YouTube

Today I’ll be talking about one of the high-end trusts established to reduce gift inheritance taxes,

called grantor retained annuity trust, also known as GRAT.

As I said often in other videos, there are three main types of taxes.

Income taxes imposed on the income earned, gift inheritance taxes incurred in transferring assets, and holding taxes incurred in holding assets.

Among them, the holding tax is property tax, but it is charged with a certain percentage of one’s assets.

For example, if you have $1 million worth of real estate, you'll be taxed 1~2% depending on the county and city your assets are located in.

Therefore, there are relatively limited ways to save taxes through tax planning,

and what we usually call tax-saving planning refers to planning income tax and gift inheritance tax.

The GRAT we are talking about today is a TRUST technique established to reduce gift inheritance taxes.

In other words, by using GRAT, Mr. Hong can reduce the gift tax incurred when giving his assets to his children. Let’s take a more detailed look.

Let's think about Mr. Hong’s situation. He holds a stock. In other words, it's a pre listed stock.

Now, assuming that it is worth $100 for discussion purposes, it will grow and go up in value in 3 years. Let’s say $1,000.

Now, take a look at the picture. There's the Grantor, and they establish a Trust and give it to the beneficiaries. I said this when I explained all the trusts.

The Grantor, as a component of the Trust, is the founder. Hence the one who moves assets.

One establishes a special purpose company called Trust.

Beneficiaries ultimately enjoy benefits by moving assets and increasing the (value of) transferred assets.

When the Grantor puts in assets, for example, Mr. Hong put in $100 of assets and in return, it will be this trust for 3 years in the form of Annuity.

The equivalent value of the asset invested for 3 years will be returned.

For example, it's a structure where one receives back every year such as $30, $40, etc.

And the appropriate interest will be added to this and given

It is known as the interest rate according to the provisions of Article 7,520 of the IRS, but you don't need to know this part.

In the end, what we can see from these transactions is that the $100 asset that the Grantor, Mr. Hong sends is not donated to the Trust, but sold.

He sells and then receives it in the form of Instruments Annuity.

And the value of the assets transferred increases, and the assets are finally enjoyed by Beneficiaries.

If you look at this in more detail, The purpose is to reduce the gift inheritance tax in gifting Mr. Hong’s $100 stock, which is expected to grow to $1000.

This method is an irrevocable trust.

This will include assets that are expected to rise substantially, and as earlier stated, pre listed startup stocks, or real estate that is expected to grow a lot in value.

I also said that it's not moving, but selling.

And in return for this, the Grantor will receive cash in the form of a pension for a certain period of time.

And another issue to be noted is Grantor Trust. Of course, this is a technical term, so to briefly explain the concept,

there will be taxes imposed on income generated from operating and managing assets transferred to this trust.

There will be income tax, which means the Grantor will pay for it. Through this you can get the effect of reducing additional gift taxes. I'll explain this a bit later.

Then, what is the result that can be achieved through this?

Mr. Hong has an asset worth $1,000 without gift tax, which will be $1,000 in 3 years, although it's $100 at the moment. He will be able to gift the asset worth $1,000 without gift tax.

In addition, with paying income tax, Mr. Hong will be able to receive additional gift tax benefits by paying income tax imposed on income generated from this asset as the Grantor.

I'll compare the contents in more detail and explain.

If you look at the table, you can compare three situations.

The first thing is not doing anything. Not giving it away but giving it in 3 years.

The second is outright transferring, gifting something right away.

And the third is to gift it through GRAT. If you look at each one in the current time of gifting,

In the first option to give after 3 years, of course, there will be no gift tax because you are not giving it now.

And for the second option, if you give it right now, you're giving away $100 worth of assets, so a $40 gift tax will be imposed.

In this example, it is assumed that 40% of taxes are applied and 40% of income taxes will be applied to all 3 cases.

And thirdly, in the case of GRAT at the time of donation, it's not a gift, but a sale. That's why there is no gift tax.

Next, at the time of expiration in 3 years, It means that the stock has grown and it has become a $1,000 asset by just giving it away 3 years later.

Then the gift tax generated by the donation at that time will be 40%, $400.

And if the gift was given immediately in the first year, of course, because the ownership has already been transferred, there will be no additional gift tax after 3 years.

And I also explained there is no additional gift tax in the case of GRAT. Therefore, there is no gift tax incurred.

Next is the benefit of income tax. We first have to assume that this stock is finally sold.

If you say you sold it after it reached $1000, then it would be taxable on the gains from the sale, and regarding the donation made 3 years later, Grantor does not have the effect of paying income tax instead when giving away after three years.

That's why there are no additional benefits from income tax. And the same goes for immediate donation.

Immediately giving something away when you have already given to your children, will result in your children having to pay taxes on the income generated from the gifted assets later.

That’s why even if you give more there won’t be a bigger gift effect in sync with taxes.

Finally, when it comes to GRAT, the Grantor can pay taxes on the income generated by the Trust, and the income tax paid instead is not recognized or considered a gift.

So for example, if I reach $1,000, there's going to be some income from selling that asset.

If you say that the original cost was $100, you would pay taxes on $900, but since there’s a 40% of the tax, so you would pay $360.

Then Mr. Hong will pay for this. And by doing so, the assets that remain in the trust itself will increase by that much.

By paying taxes instead, there are no assets that will decrease. I hope you understand what I'm saying.

The $360 gift tax reduction means that an additional benefit of $144 is given if you multiply 360 by 40%.

In the end, if you compare these three cases as a whole, if you don't give it now and give it 3 years later, the taxes incurred will be -$400.

And if I give it right now, the gift tax burden will be $40, and on the other hand if the gift is made through GRAT, there will be no gift tax, and there will be an additional positive benefit of $144.

So compared to the worst, there is a greater benefit of $544 and it can be interpreted as a benefit of $184 compared to giving away immediately. It's a huge benefit.

In conclusion, first, if you have assets to give now and second, if the asset is expected to rise in market value, such as real estate or pre-listed startup stocks,

you can benefit greatly in terms of gift inheritance tax by using GRAT, so those who are eligible should consult an expert and start "Trust Planning."

In particular, according to the recent Green Book and tax increase plan of the Biden administration, the tax burden on gifts is getting significantly higher than that of the current law,

so even if it is slightly revised in the future, it will become a reality as early as 2021 or at latest 2022. So you should start planning soon.

I hope this helped you. I'll continue to make videos about tax planning ideas that we can use.

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