What limitation applies to the use of a GRAT regarding gift taxes?

A Grantor Retained Annuity Trust (GRAT) is an estate planning tool used primarily to transfer wealth while minimizing gift and estate taxes. One important limitation regarding GRATs is that they do not qualify for the annual gift tax exclusion.

The annual gift tax exclusion allows individuals to give a certain amount to any number of people each year without incurring gift taxes or using up their lifetime gift tax exemption. However, when a GRAT is established, the value transferred to the beneficiaries is based on the present value of the remaining interest after the grantor retains an annuity. Since the gift comprised of a future interest (the beneficiaries' right to receive the remainder at the end of the annuity term) does not happen until a later date, it does not fall under the annual exclusion for gifts that are considered "present interests."

In summary, the limitation pertains to the classification of the interest being gifted. Since GRATs involve the transfer of a future interest rather than an immediate interest, they are ineligible for the annual gift tax exclusion.