Question of the Month (August 2021): Trust Selection

Posted by Adam Scherer, CFP®, MS

Aug 16, 2021

John recently received a financial windfall from his deceased Aunt Helen. He would like to set up a trust to function as an inflation hedge and generate a variable amount of annual income for a duration of 10 years. After expiration of the trust term, John would like the assets within the trust to pass to his son and daughter, who will be listed as the beneficiaries. He will use a portion of the windfall to make one initial contribution to the trust and plans to add additional assets incrementally throughout the trust term.

Which trust best meets John’s needs?

  1. GRAT
  2. GRUT
  3. CLUT
  4. QPRT

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Correct answer: B. GRUT

Instructor insight:

With a Grantor Retained Unitrust (GRUT), the grantor receives a payment recalculated annually by applying a fixed percentage of the current FMV of the transferred property. Additional assets can be contributed to the trust. Often, a GRUT is implemented to serve as an inflation hedge.

After expiration of the trust term, the assets pass to the beneficiaries who receive carryover basis and possession of the items. Based upon John’s variable income needs, desire to transfer assets to beneficiaries, and his specified funding method (lump sum payment, then incremental contributions), a GRUT is the best choice available.



Topics: Practice Questions