Grantor Retained Income Trust (GRIT): How to Gift Assets to Non-Family at a Discount
Grantor Retained Income Trust (GRIT): How to Gift Assets to Non-Family at a Discount
EXECUTIVE SUMMARY
- The Mechanism: A GRIT is an irrevocable trust where you transfer assets but keep the right to the income (or use of the property) for a fixed term (e.g., 10 years). After the term, the asset goes to the beneficiary.
- The Discount: Because you kept the “income rights,” the IRS values the gift to the beneficiary at a deep discount (Present Value of the Remainder). A $1M house might be valued at only $400k for gift tax purposes.
- Authority Baseline: This strategy relies on the fact that IRC § 2702 (which restricts GRATs/GRUTs) does not apply to transfers to “non-family members” (nieces, nephews, friends, unmarried partners).
- Scope Limitation: You cannot use a GRIT for your spouse, children, or parents. It is strictly for “collateral heirs” or unrelated parties.
Estate planning usually focuses on spouses and kids. But what if you want to leave money to your partner (unmarried), your favorite niece, or your best friend? Standard gifting hits the full 40% tax. The GRIT allows you to “eat your cake and have it too.” You enjoy the asset for 10 years, and then pass it on at a fraction of its tax value. According to Team BMT Analysis, this is the #1 strategy for LGBTQ+ couples (unmarried) and aunts/uncles with no children. Source: American College of Trust and Estate Counsel (ACTEC)
Scenario: You (Age 60) want to give a $1M vacation home to your Nephew. 7520 Rate is 5%.
- Direct Gift: You sign the deed today.
Gift Tax Value: $1,000,000. (Uses up $1M of exemption). - 10-Year GRIT: You transfer the home to a GRIT. You keep the right to live there for 10 years.
Retained Interest Value: ~$600,000 (Your 10 years of “rent-free” use).
Remainder Interest Value: ~$400,000. (This is the taxable gift).
Result: You transferred a $1M asset using only $400k of exemption.
Gift Tax Exposure
| Transfer Method | Taxable Gift Amount |
|---|---|
| Direct Transfer | 1000000 |
| 10-Year GRIT | 400000 |
*Chart Note: The longer the term you retain the asset (e.g., 15 years), the lower the gift tax value becomes. However, if you die during the term, the strategy fails.
CRITICAL SCENARIO: The “Family Definition” Trap
Who is allowed?
| Relationship | Can use GRIT? |
|---|---|
| Spouse, Child, Parent, Sibling | NO. IRC § 2702 blocks this. Use a GRAT or QPRT instead. |
| Niece, Nephew, Cousin, Friend, Unmarried Partner | YES. They are not “Family Members” under the strict definition of § 2702. |
Execution Protocol
GRITs are perfect for Primary Residences or Vacation Homes because you can live in them (Retained Use) without needing to generate cash income. Stocks work too, but the trust must pay you the dividends.
Choose a term you are likely to survive. If you are 60 and in good health, a 10-15 year term is safe. If you die in Year 9 of a 10-year GRIT, the asset reverts to your estate, and you saved nothing (but lost nothing except legal fees).
You must file a Gift Tax Return to report the transfer. The discount is calculated using the IRS Section 7520 rate for the month of transfer. Higher rates = Better discounts for GRITs (usually).
Decision Order: Verify Beneficiary Relationship → Choose Term → Fund Trust → File Form 709.
WEALTH STRATEGY DIRECTIVE
- Do This: Use a GRIT if you are single with no kids and want to pass wealth to nieces/nephews efficiently. It allows you to leverage your lifetime exemption significantly.
- Avoid This: Using a GRIT for high-basis assets. The beneficiary gets a “Carryover Basis.” If the asset has low basis, the GRIT saves Estate Tax but might trigger Capital Gains Tax later for the heir. (Step-up is lost).
Frequently Asked Questions
Can I rent the house later?
Yes. After the 10-year term ends, the house belongs to your nephew. If you want to keep using it, you must pay him “Fair Market Rent.” This actually helps transfer more wealth to him tax-free.
What if I get married?
If you create a GRIT for your partner and later marry them, the trust remains valid because the relationship is tested at the time of transfer.
Is this better than a QPRT?
A QPRT (Qualified Personal Residence Trust) is basically a GRIT that is allowed for family members. A “Common Law GRIT” is broader (can hold stocks) but limited to non-family.