What Is a Grantor Retained Annuity Trust (GRAT)?
Let me explain what a grantor retained annuity trust, or GRAT, really is. It's an estate planning tool you can use to cut down on taxes when you're giving large financial gifts to family members. This setup helps you avoid dipping into much, if any, of your lifetime gift and estate tax exclusion from the IRS.
You create an irrevocable trust for a set period and put assets into it. Then, you get annuity payments each year as the grantor. When the trust ends and you've received your last payment, the beneficiary gets the assets with little or no gift taxes to pay.
Key Takeaways
GRATs let you, as the grantor, lock assets into a trust and earn annual income from them. These trusts run for a specific number of years. At the end, the beneficiary receives the assets with minimal or no gift tax hit. Wealthy people often turn to GRATs to keep their tax bills down.
Understanding Grantor Retained Annuity Trusts (GRATs)
When someone dies, two taxes might come into play. Estate tax hits the value of everything the deceased owned or had an interest in at death, and it's paid from the estate itself. Gift taxes apply to anything given away during life without getting value back.
These taxes share a lifetime exemption. You add the estate's value to taxable gifts made in life, but you don't pay on the whole thing because the IRS gives a lifetime exclusion to subtract. For 2025, that's $13.99 million, up from $13.61 million in 2024. So if your gifts and estate total $14 million in 2025, you'd only pay tax on $100,000; at $13 million, nothing at all.
There's also an annual gift exclusion: $19,000 per person in 2025, $18,000 in 2024, tax-free. Any excess can apply to your lifetime exclusion or you pay tax that year.
A GRAT is an irrevocable trust where you, the grantor, can pass big wealth to the next generation with little or no gift tax. You set it up for a fixed term, transfer assets to it, but keep the right to get back the original value plus the IRS's 7520 rate of return over the term.
When the term ends, leftovers—any appreciation beyond the IRS rate—go to your beneficiaries. That's basically the growth minus the assumed return.
GRAT Risks
Annuity payments come from interest on the trust assets or a percentage of their total value. But if you die before the trust expires, the beneficiary gets nothing, and the assets go back into your taxable estate, rendering the GRAT pointless.
The GRAT needs assets to appreciate to work; depreciation kills it. Also, the low 7520 rate in recent years has cut into its benefits.
GRAT Uses
GRATs suit wealthy folks facing big estate taxes at death. You can freeze your estate's value by shifting appreciation to heirs. Say you have a $10 million asset expected to hit $12 million in two years—you transfer the $2 million difference to kids tax-free.
If you die during the term, the remainder interest counts in your estate, but you could pass annuity rights to a spouse for marital deduction, wiping out related estate tax.
They're great for startup shares where IPO growth beats the 7520 rate, letting you pass more to kids without using up your exclusion.
GRAT History
GRATs boomed in 2000 after a Tax Court ruling for the Walton family in Audrey J. Walton v. Commissioner. The court okayed GRATs that returned all original assets to the grantor, leaving only appreciation for beneficiaries tax-free. This zeroed-out GRAT, or Walton GRAT, reduces the initial gift value to zero.
Example of a GRAT
Take Mark Zuckerberg: He put Facebook's pre-IPO stock into a GRAT. Details aren't public, but Forbes estimates he transferred over $37.32 million in value this way.
What Is an Irrevocable Trust?
An irrevocable trust can't be easily changed once set up—you can't undo it or pull assets out. Since you've given them away, they're not in your estate at death, so no estate tax on them. But you might owe gift tax when funding it, subject to annual and lifetime exclusions. Beneficiaries don't pay that tax, so a GRAT still helps them.
How Does the 7520 Rate Work?
The 7520 rate from IRC Section 7520 is 120% of the federal midterm rate for the valuation month, rounded to the nearest two-tenths percent. It applies to certain trust interests.
Does a GRAT Affect the Inheritance Tax?
If you die during the term, beneficiaries pay inheritance tax, which they owe directly—not the estate or trust. GRATs don't change that. The feds don't have this tax, but six states do: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.
The Bottom Line
A GRAT is an irrevocable trust with a fixed lifespan, designed to transfer assets while cutting gift tax. It's for those with assets over the IRS exclusion. If you're considering one, get professional legal advice—you can't easily reverse an irrevocable trust if you mess up.
Other articles for you
A total bond fund is an investment vehicle that replicates a broad bond market index to provide diversified exposure to various bonds.
Zero-rated goods are products exempt from value-added tax in VAT-using countries to make essentials more affordable and support supply chains.
Microeconomics studies how individuals and firms make decisions in response to incentives, prices, resources, and production methods.
Gold options are derivative contracts allowing the right, but not obligation, to buy or sell gold at a preset price using physical gold or futures as the underlying asset.
The investment multiplier explains how initial investments amplify economic impact through cycles of spending and income.
The realization multiple measures the actual returns paid out to investors in private equity by dividing cumulative distributions by paid-in capital.
Capacity utilization rate measures how much of an organization's or economy's potential output is actually being achieved.
Open architecture allows financial institutions to offer both in-house and third-party products to better serve clients' needs without conflicts of interest.
Rollover risk involves the potential higher costs when refinancing maturing debt or rolling over derivatives positions due to changing interest rates or market conditions.
Demutualization is the process where a member-owned mutual company converts into a publicly traded shareholder-owned corporation.