Estate planning can be one of the most complex elements of building a comprehensive financial plan. If you’ve worked hard to grow your wealth, you likely want to pass it on efficiently. For high-net-worth individuals, estate and gift taxes can pose a significant hurdle.

One tool worth considering is a Grantor-Retained Annuity Trust (GRAT). When structured correctly, a GRAT can help you reduce your taxable estate while passing along appreciated assets to your beneficiaries with minimal gift tax liability.

What Is a Grantor-Retained Annuity Trust (GRAT)?

A GRAT is an irrevocable trust that allows a person (the "grantor") to transfer assets to beneficiaries while retaining the right to receive annuity payments for a set term.

During the GRAT’s term, the grantor receives annual annuity payments based on the initial value of the assets in the trust and an IRS-determined interest rate known as the Section 7520 rate. At the end of the term, any remaining assets—including any growth beyond the IRS-assumed rate—pass to the beneficiaries free of additional gift tax.

This strategy hinges on one key benefit: if the assets in the GRAT appreciate faster than the IRS’s assumed growth rate, the excess appreciation passes to your heirs gift tax–free.

How a GRAT Works: Step-by-Step

1. Set Up the Trust: You create a GRAT and transfer appreciating assets (like stocks or real estate) into it.
2. Receive Annuity Payments: Over the GRAT term (typically 2–10 years), you receive fixed annual payments.
3. Transfer Remainder: Any assets left after the term—plus any appreciation above the IRS’s assumed rate—go to your beneficiaries, with minimal or no gift tax.

You can even “zero out” the gift tax by structuring the annuity payments to equal the value of the contributed assets plus interest. This makes GRATs particularly useful for reducing estate tax exposure.

GRAT Example

*rate for December, 2025

In the example above, the grantor avoided paying gift taxes altogether while also leaving $88,000 to their beneficiaries. Meanwhile, if that same dollar amount had passed down to their heirs at their time of death, that gift would be subject to the current 40% federal estate tax. By using a GRAT, this grantor saved $35,575 in taxes.

Types of GRATs

Standard GRAT: Single-term trust with fixed payments. Remaining assets pass to beneficiaries at the end of term.

Rolling GRAT: A series of short-term GRATs that reinvest annuity payments into new GRATs. Helps manage risk and capture gains more frequently.

Zeroed-out GRAT: Annuity is structured to eliminate taxable gift value. Maximizes tax efficiency if assets outperform projections.

Key Tax Implications of a GRAT

• Income Tax: The grantor pays tax on the income generated during the trust’s term, which preserves the full value of the trust for beneficiaries.
• Gift Tax: The taxable gift is calculated at trust creation. If structured as a zeroed-out GRAT, the value of the gift can be near zero.
• Estate Tax: If the grantor dies before the GRAT term ends, the remaining trust assets may revert to their estate—reducing the potential tax savings.

Pros and Cons of GRATs

Pros

• Transfer appreciation gift-tax free
• Retain income during GRAT term
• Reduce size of taxable estate
• Effective during periods of low interest rates

Cons

• If you die during the GRAT term, tax benefits may be lost
• Irrevocable: once created, it cannot be changed
• Best suited for high-growth assets
• Beneficiaries inherit grantor’s cost basis (potential capital gains implications)

Is a GRAT Right for You?

GRATs are powerful tools for estate tax planning—but they aren’t one-size-fits-all. They’re ideal for individuals with:

• Large estates likely to exceed federal estate tax exemptions
• High-yield or rapidly appreciating assets
• A long-term estate plan in place

Proper setup and timing are essential, especially in low-interest rate environments. GRATs are most effective when assets are expected to significantly outpace the IRS’s assumed growth rate.

Next Steps: Explore GRAT Strategies with an Advisor

If you’re interested in exploring how a GRAT might fit into your broader estate plan, reach out to a member of our team. A personalized plan can help you optimize what you leave behind—and reduce what you lose to taxes.

Frequently Asked Questions about GRAT

Who pays income tax on a GRAT?

The grantor does, which allows the assets in the trust to grow tax-free for beneficiaries.

What kinds of assets work best in a GRAT?

Assets with high appreciation potential, such as stocks, real estate, or private business interests.

What happens if the grantor dies during the GRAT term?

The remaining assets revert to the grantor’s estate and may be subject to estate tax.

Can a GRAT be changed once created?

No. GRATs are irrevocable, so they cannot be altered or canceled.

How long should a GRAT term be?

Terms typically range from 2 to 10 years. Longer terms can allow for more growth but increase the risk of the grantor’s death before the term ends.

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