What is a "grantor retained annuity trust" (GRAT)?

A grantor retained annuity trust (GRAT) is specifically designed to allow the grantor, who establishes the trust, to receive annuity payments over a specified period of time. The key feature of a GRAT is that it provides the grantor with fixed payments, typically annual, for a predetermined duration. At the end of this term, any remaining assets in the trust are transferred to the beneficiaries, often resulting in significant estate tax benefits. This structure is particularly advantageous in estate planning because it allows the grantor to benefit from the assets held in the trust while also passing on wealth to heirs in a tax-efficient manner.

The other options refer to different types of trusts or requirements not characteristic of a GRAT. For example, annual audits are not a standard requirement for all trusts, and while some trusts can provide lifetime income to beneficiaries, that is a feature more associated with other trust types, such as charitable remainder trusts or income trusts. Lastly, a charitable trust typically involves provisions for long-term giving to charity, which does not align with the primary function of a GRAT, focused on providing annuity payments to the grantor before transferring assets to beneficiaries.