Grantor Retained Annuity Trusts (GRATs): What They Are and How They Work

A Grantor Retained Annuity Trust (GRAT) is a powerful estate planning tool often used by high-net-worth individuals to transfer wealth to heirs with minimal gift or estate tax exposure.

If you’re looking for a way to pass appreciating assets to your family in a tax-efficient way… this strategy may be worth exploring.

What Is a GRAT?

A GRAT is an irrevocable trust into which the grantor (you) transfers assets.

In return, you retain the right to receive a fixed annual annuity payment for a set term (usually 5–10 years).

At the end of the term, any remaining assets in the trust pass to your beneficiaries—such as your children, heirs, or another family trust.

How a GRAT Works

1. Funding the Trust
The grantor contributes appreciating assets (e.g., stocks, private business interests, real estate) into the GRAT.

2. Annuity Payments
The IRS requires annual payments back to the grantor, calculated using the §7520 interest rate.

3. Passing Assets to Heirs
If the trust’s assets grow faster than the IRS rate, that excess growth passes to beneficiaries free of additional gift tax.

Benefits of a GRAT

• Tax Efficiency: You can “zero out” the GRAT by setting annuity payments so the taxable gift value is nearly zero.

• Wealth Transfer: If assets outperform the IRS assumed rate, the appreciation passes to heirs tax-free.

• Retained Control: You continue to receive annuity payments during the GRAT term.

• Risk Mitigation: Especially useful when transferring volatile or high-growth assets.

Risks & Considerations

• Mortality Risk: If the grantor dies during the GRAT term, the assets are pulled back into the estate.

• Performance Risk: If assets don’t outperform the IRS rate, little or nothing passes to heirs.

• Irrevocable: Once funded, assets are locked in and cannot be reclaimed.

When to Use a GRAT

GRATs are especially effective when:

• Transferring rapidly appreciating assets (e.g., pre-IPO stock, concentrated equity positions, real estate expected to rise in value).

• Taking advantage of low IRS §7520 rates, which reduce the annuity hurdle.

• Planning for ultra-high-net-worth families seeking to minimize transfer taxes.

Closing Thoughts…

A GRAT can be a highly effective estate planning tool, especially in a low-interest-rate environment and with assets expected to appreciate significantly.

It allows substantial wealth transfer to heirs with little to no gift tax liability, but it requires careful structuring and timing with a qualified advisor. Call us today if you’d like to discuss.