Grantor Retained Annuity Trust (GRAT)

A Grantor Retained Annuity Trust (GRAT) is an estate-planning structure in which a grantor transfers assets into an irrevocable trust, then receives back a series of fixed annuity payments, a predetermined dollar amount each year, over a defined term. At the end of the term, whatever value remains in the trust above an IRS-assumed growth rate (called the Section 7520 rate) passes to beneficiaries, often with little or no gift tax.

The core logic is straightforward: if the assets inside the GRAT grow faster than the IRS hurdle rate, the excess appreciation escapes the taxable estate. A hypothetical technology executive might contribute appreciated stock options into a GRAT shortly before vesting, hoping the shares outpace the hurdle rate over a two-year term. The annuity payments return her original value; only the upside transfers.

A key risk is the "mortality risk": if the grantor dies before the term ends, the strategy generally fails and assets return to the estate. A common confusion is believing a GRAT is risk-free. If assets underperform, nothing is transferred and the exercise is a wash, not a loss, but professional costs are still incurred. Grantor trust status typically applies, meaning income inside is taxed to the grantor. A qualified attorney and CPA must evaluate suitability for any particular family.