GRAT — Grantor Retained Annuity Trust
A trust that transfers future appreciation of your assets to your heirs with no gift tax — by retaining an annuity that pays you back what you put in, leaving all growth above the IRS benchmark for your heirs at zero tax cost.
Normally, when you give assets to your children, you use your $15 million lifetime exemption. A GRAT is a structure that allows you to transfer the appreciation on assets to your heirs — without using any lifetime exemption — by keeping the assets themselves.
Here is how: you put assets into an irrevocable trust that pays you an annuity for a fixed term (typically 2 to 5 years). The annuity is structured to pay you back roughly what you put in plus interest at the IRS's benchmark rate. At the end of the term, whatever is left in the trust — which is everything that grew above that benchmark rate — passes to your heirs gift-tax-free.
The gift tax calculation uses only the "expected" remainder for your heirs at the time you fund the trust. If you set the annuity payments high enough that the "expected" remainder is near zero, the taxable gift is near zero — even though significant wealth may ultimately transfer if the assets outperform the benchmark.
The GRAT has an unusual risk profile: the downside is extremely limited.
If assets outperform the IRS benchmark rate: The excess growth passes to your heirs gift-tax-free. If you put $5 million in a GRAT and it grows to $8 million, you receive $5 million back (approximately) via annuity payments, and your heirs receive $3 million with no gift tax. You used essentially no lifetime exemption. The $3 million transferred to the next generation for free.
If assets match the benchmark rate: You receive everything back via the annuity. Your heirs receive nothing from this particular GRAT. You lost nothing except the legal fees to set it up and 2 to 5 years of time.
If assets underperform: The annuity payments exceed the trust's growth, so the trust returns assets to you to satisfy the payments. You end up receiving your assets back, essentially as if the GRAT never happened — minus the setup cost.
This is why practitioners call the GRAT "heads I win, tails I break even." The worst outcome is: nothing transferred, minor costs incurred. The best outcome: millions transferred tax-free.
GRATs work best with assets that are expected to appreciate significantly above the IRS benchmark rate in the near term. The benchmark (Section 7520 rate) fluctuates monthly with interest rates. Any growth above this rate is what passes to heirs.
Ideal GRAT assets: Concentrated stock positions before a catalyst event (earnings release, product launch, anticipated IPO). Closely held business interests before a value-creation event (signing a major contract, entering a new market). Pre-IPO equity. Real estate in an area expected to appreciate significantly. Private equity interests with identified near-term liquidity.
Less effective: Cash, bonds, and assets expected to return at or near the 7520 rate. The math does not favor GRATs when expected growth barely exceeds the benchmark.
- Appreciation above the IRS 7520 rate passes to heirs completely gift-tax-free — you transfer growth without using any lifetime exemption on the transferred amount.
- Zeroed-out structure minimizes gift tax exposure — the taxable gift at funding is near zero, so even in the best-case scenario where millions transfer, virtually no lifetime exemption is consumed.
- No downside risk to your exemption — if the GRAT fails (assets underperform), you used essentially zero exemption and simply receive your assets back.
- Multiple GRATs can run simultaneously — you can fund GRATs with different assets at the same time, diversifying across multiple potential value-creation events.
- Rolling GRATs: when assets are returned via annuity payments, immediately fund a new GRAT with those returned assets, capturing any future appreciation in the new structure.
- Mortality risk — if you die during the GRAT term, the assets are pulled back into your taxable estate. Shorter terms reduce this risk — 2-year GRATs are common specifically to minimize the period of exposure.
- Trust income is still taxed to you — as the grantor, you pay income tax on all income generated by GRAT assets during the term. For dividend-paying stocks or income-producing real estate, this is an ongoing cost.
- GRAT assets do not receive a step-up in basis at your death if you die during the term (because they return to your estate) — but this is only relevant if mortality risk materializes.
- Hard-to-value assets require qualified appraisals — for closely held business interests, real property, or other non-traded assets, a qualified appraisal is required at funding and may be required again at the end of the term.
- Annual annuity payments must be made on schedule — failure to make timely payments can disqualify the GRAT. The trustee must manage the trust's liquidity to ensure payments are made regardless of investment performance.
Design the GRAT — term, rate, annuity amount
We calculate the zeroed-out annuity amount using the current IRS Section 7520 rate (published monthly). The term is selected based on the expected appreciation timeline of the asset — typically 2 to 5 years — and the grantor's health and life expectancy (shorter terms reduce mortality risk). We model the expected remainder under various appreciation scenarios so you understand the range of possible outcomes.
ShurekEstate attorney drafts the GRAT trust document
The GRAT document must satisfy the requirements of Section 2702 — it must specify the annuity amount or percentage, the annuity payment schedule, the fixed term, and the remainder beneficiary. Minor technical errors in the document can disqualify the GRAT entirely. Experienced estate planning counsel is required.
Estate attorney — Shurek provides the economic parametersTransfer assets into the GRAT
Securities are transferred to the GRAT's account. For closely held business interests or real estate, transfer documentation is prepared. The transfer must be complete and the assets must be in the trust before the annuity term begins.
Shurek coordinates with custodians and attorney for real propertyFile Form 709 gift tax return at funding
Even though the zeroed-out GRAT produces a near-zero taxable gift, a gift tax return must be filed to document the transfer and start the statute of limitations. The return reports the asset transferred, the annuity amount, the term, and the calculated present value of the remainder (near zero).
Shurek — filed April 15 of the following yearAnnual annuity payments during the term
The trustee makes the required annuity payment to you on schedule — typically annually. The payment may be made in cash (if the trust has sold assets to generate it) or in kind (a portion of the trust's securities transferred back to you directly). In-kind payments are common when the trust holds concentrated stock — this avoids triggering a capital gains event within the trust.
Trustee manages — Shurek monitors complianceAt term end — remainder to heirs
When the GRAT term expires, whatever remains in the trust passes to the designated remainder beneficiaries — typically your children directly or a dynasty trust. No gift tax at this transfer. The assets carry over the GRAT's basis — not a stepped-up basis — which is an important consideration for subsequent disposition planning.
Trustee distributes — Shurek advises on subsequent planning for the transferred assets| Form | Name | When Due | What It Does and Why It Matters |
|---|---|---|---|
| 709 | Gift Tax Return | April 15 of year after funding | Documents the funding of the GRAT, the transferred asset's value, the annuity amount, and the calculated present value of the remainder (typically near zero). Filing starts the 3-year statute of limitations on IRS challenge of the valuation. If a qualified appraisal was used to value the transferred asset, it is attached. |
| 1040 + Grantor Trust Statement | Individual Return with GRAT income attachment | April 15 annually during the term | GRAT income flows to your personal return during the term — dividends, interest, and capital gains generated by GRAT assets are all taxable to you as the grantor. A grantor trust statement documents which income items come from the GRAT. No separate trust return required during the term. |
| 1040 (annuity income) | Annuity payments received are taxable income | Annually during the term | The annuity payments you receive from the GRAT are taxable income to you — ordinary income to the extent of the trust's ordinary income, capital gains to the extent of capital gains. We calculate the income character each year based on the trust's distributions. |
Economic design of the GRAT — term, annuity amount, benchmark rate analysis, and scenario modeling across different appreciation outcomes. Form 709 preparation. Annual grantor trust reporting. Monitoring compliance with annuity payment schedule. Advising on rolling GRAT strategy and subsequent asset planning.
Drafts the GRAT trust document to satisfy Section 2702 requirements. Handles any valuation documentation requirements for hard-to-value assets. Coordinates the trustee appointment.
Identify the assets you believe have strong near-term appreciation potential. Review the economic modeling before funding. Receive the annual annuity payments. Consider rolling returned assets into new GRATs to create a continuous wealth transfer pipeline.
The GRAT has a fixed term — typically 2 to 5 years — with specific annual obligations during that term. Missing the annuity payment deadline or dying during the term are the two primary risks, both of which are managed through calendar discipline.
Transfer Assets and Establish GRAT Term
Assets transferred to the GRAT trust. The annuity term begins. The §7520 rate in effect this month is locked in as the benchmark. We document the transfer and begin tracking the annuity payment schedule.
Form 709 Gift Tax Return — Near-Zero Taxable Gift
The zeroed-out GRAT produces a taxable gift of nearly zero — the annuity payments are structured to return essentially the full contributed value in present value terms. Form 709 is still required to document the transfer and start the IRS statute of limitations. Filed by April 15 of the following year.
Annuity Payment Due to Grantor
The trustee must make the required annuity payment to you within the calendar year specified in the trust document. This is typically the same date each year throughout the term. Failure to make the payment on time can disqualify the GRAT. We track this deadline and confirm with the trustee that payment is made on schedule.
Form 1040 with GRAT Income
GRAT income flows to your personal return during the term via grantor trust reporting. Dividends, interest, and capital gains from assets inside the GRAT appear on your Form 1040. The annuity payments you receive are also taxable income — we determine the character (ordinary vs. capital gains) based on the trust's income.
Remainder Passes to Beneficiaries
Whatever remains in the trust after satisfying all annuity payments passes to the named remainder beneficiaries — typically children or a dynasty trust. This transfer is gift-tax-free regardless of the amount. The assets carry over the GRAT's basis (not a stepped-up basis), which we consider when advising on subsequent planning for the transferred assets.
Rolling GRAT Opportunity
Annuity payments received from the completed GRAT can be immediately contributed to a new GRAT, capturing any further appreciation in the new structure. This "rolling GRAT" strategy creates a continuous pipeline. We model the economics of a new GRAT using the current §7520 rate and advise on optimal timing.