A grantor retained annuity trust (GRAT) or a grantor retained unit trust (GRUT) can be used to shift income to your children and reduce your estate. A grantor retained annuity trust (GRAT) is an irrevocable trust in which the grantor retains a right to receive fixed amounts for life or for a term of years. At the end of the term, the remaining trust corpus is distributed to the trust beneficiary. A GRUT is an irrevocable trust in which the grantor retains a right to receive amounts that are a fixed percentage of the fair market value of the trust’s assets (determined annually) for life or for a term of years. At the end of the trust term, all remaining assets are distributed to the trust beneficiary.

Specific Details

The parents shifted $5,000 of income to their child by using a grantor retained annuity trust or a grantor retained unit trust to shift income to their children. Since the parents income was taxed at the 30% tax bracket, the income reduction may decrease their income taxes by $1,500 ($5,000 x 30%). Since the childs taxable income was taxed at the 0% tax bracket, there may be no tax on the income. Therefore, because of the income shifting, the total family tax savings may be $1,500.

Potential Savings

If you are in a combined (federal, self-employment, and state) tax bracket of 30%, you could reduce your taxes up to $300 for every $1,000 of income reduction by using a grantor retained annuity trust or a grantor retained unit trust can be used to shift income to your children.