A grantor retained annuity trust (GRAT) is an estate planning technique whereby the grantor makes an irrevocable gift of assets to a trust, all by retaining a payment stream from the trust in the form of an annuity generally for the life of the settlor, for a fixed term of years, or for the shorter (but not the longer) of these periods (1). GRATS are sometimes called split interest trusts because they are comprised of two forms of interests, retained interests, which the grantor receives as an annuity, and remainder interests, which pass to the beneficiary upon termination of the trust. The gift tax on the transfer of assets into the GRAT is determined upon creation of the GRAT based on the fair market value of the remainder interest at the time of the gift, which is the fair market value of the property transferred to the trust minus the value of the retained annuity interest. Retained interest is determined by an actuarial calculation that takes into account the present value of the annuity the grantor receives using the §7520 rate. §7520 provides, in part, that the value of any annuity shall be determined according to tables prescribed by the Secretary and using an interest rate equal to 120 percent of the federal mid-term rate in effect under §1274 (d)(1) for the month in which the valuation date (2) falls. Calculation of residual interest GRAT The calculation of the value of residual interest involves three steps. The first step is to find the annuity factor from Table B for the appropriate trust term and the applicable federal rate for the month in which the transfer to the trust occurs. Schedule B can be viewed on the IRS website. The next step is to calculate the constituent value and...... middle of paper ......e.org/thumbs/datastorage/skoob/articles/BK45-CH01_thumb.pdf24. http://claritywealthadvisors.com/wp-content/uploads/2012/05/Irrevocable-Life-Insurance-Trusts-ILITs.pdf25. http://www.lexisnexis.com/legalnewsroom/estate-elder/b/estate-elder26. http://wealthcounsel.typepad.com/legalblog/2008/03/what-are-hangin.html27. http://www.investopedia.com/terms/s/secondtodieinsurance.asp28. http://ezinearticles.com/?Grantor-Retained-Annuity-Trusts&id=365631529. http://www.ddrs.com/grits-grats-and-defective-grantor-trusts-the-best-laid-plans/30. https://pts.aboutestateplanning.com/documents/QPRT_Trust.pdf31. Code Sec. 1361(e)(1)(A)(i)32. Reg. §1.1361-1(m)(2)(i)33. http://www.americanbar.org/content/dam/aba/events/taxation/taxiq-fall11-howell-smith-trusts-paper.authcheckdam.pdf34. Regulations, §1.641(c)-135. Treasures. Reg. §1.64136. Treasures. Reg. §1.641