Why are GRATs not eligible for the annual exclusion?

The correct answer is that GRATs, or Grantor Retained Annuity Trusts, are not eligible for the annual exclusion because they are not considered present interest gifts.

To understand this better, it is important to define what present interest and future interest gifts are. Present interest gifts allow the recipient immediate access to and enjoyment of the gift, whereas future interest gifts do not provide immediate access and enjoyment. In the case of a GRAT, the donor sets up the trust and retains the right to receive an annuity payment for a specified period. Because the recipient does not have immediate access to the funds until the trust term ends and the assets appreciate, this structure is categorized as a future interest gift rather than a present interest gift.

Thus, the payments or assets transferring to the beneficiaries, after the expiration of the trust term, do not qualify for the annual exclusion under the Internal Revenue Code. This classification is crucial for estate planning purposes and influences tax strategies when considering ways to minimize gift and estate taxes.