The Grantor Retained Annuity Trust

A grantor retained annuity trust, or GRAT, is a way to pass the future growth of an asset to the next generation with little or no gift or estate tax. In effect, it lets a family freeze the value of part of their estate today and transfer whatever it earns above a set rate to their heirs.

How it works

The grantor contributes cash or securities to the trust for a fixed term. Over that term, the trust pays the grantor back in annuity installments equal to the amount contributed plus a rate of interest set by the IRS — the §7520 rate, published monthly. Any appreciation above that rate stays in the trust and passes to the beneficiaries under its terms. If the assets grow faster than the §7520 hurdle, the excess moves out of the taxable estate; if they don't, the assets simply return to the grantor and little is lost but the effort.

1. A simplified, hypothetical illustration

   Suppose securities are transferred to a three-year GRAT, the §7520 rate is low, and the assets happen to grow at roughly 10% a year. The trust pays the grantor an annuity each year that returns the original value plus the IRS hurdle rate. At the end of the term, the growth above that hurdle remains in the trust and passes to the beneficiaries — potentially free of gift and estate tax. This is an illustration of the mechanics only, not a projection, a recommendation, or a promise of any result. Actual outcomes depend on the §7520 rate in effect, the assets' performance, the trust terms, and your own circumstances.

GRATs tend to be most effective when the §7520 rate is low and the contributed assets are expected to appreciate. Because that rate changes monthly and the structure is technical, a GRAT should be designed with a qualified estate attorney and tax advisor.