A GRAT, a Grantor Retained Annuity Trust, is a way to pass the future growth of an asset to your family without paying gift or estate tax on it. You put an asset into an irrevocable trust, the trust pays you back a fixed annuity for a set number of years, and whatever is left at the end goes to your beneficiaries.
What Is a GRAT?
A GRAT is an irrevocable trust where the trust creator (called the “grantor”) transfers assets to a trust in exchange for a fixed payment, or annuity, for a specific term of years. Because the trust makes fixed payments back to the grantor, which the grantor can use as income, the gift tax on the transfer can be avoided without using any of the grantor’s gift tax exemptions. The trust term can be as short as two years and typically runs between two and five years. Although the term is usually a fixed number of years, it may also be measured by the grantor’s life. The result is that you can remove the transferred asset from your taxable estate, and the growth in value of the asset passes free of estate and gift tax. It works well for cryptocurrency.
Isn’t an Irrevocable Trust a Bad Thing?
Definitely not. Modern trust law has changed the concept of “irrevocable” considerably. Under the old rules, irrevocable was a frightening word because it suggested a complete surrender of control over an asset, and people heard horror stories to match. With modern trusts we can structure things so you do not lose control. Even where someone else is named as trustee to sign documents for the trust, we can typically reserve you the right to remove and replace trustees at any time. By controlling who the trustee is, you control the trust.
What Are the Advantages of a GRAT?
- They can eliminate gift tax on transfers to family members, even where you are moving far more than the annual gift tax exclusion of $19,000 per person in 2026.
- The legal and administrative costs are small compared with the tax savings. The cost of doing nothing is usually much higher.
- Grantors can exchange assets with the GRAT without income tax or capital gains consequences.
- They are an IRS-sanctioned wealth transfer vehicle, not a loophole.
- They can support a business succession plan.
- They can “lock in” today’s value of an asset for estate and gift tax purposes, particularly useful for something you expect to grow.
- They can help address generation-skipping transfer tax when leaving assets to grandchildren or anyone more than one generation below you.
An Example of How a GRAT Works
The maths is easier with round numbers, so this example starts at $1 million, but you do not need $1 million for a GRAT to be worth doing. Think about an asset you expect to grow, such as shares of stock, or cryptocurrency if that is what you hold.
Here is the part most explanations skip, and it is the part that matters. The IRS sets a hurdle rate each month that the annuity has to keep pace with. What passes to your family tax-free is not the total growth. It is the growth above that hurdle rate. If your asset only matches the IRS rate, nothing passes. The GRAT works when the asset outperforms.
So: say you transfer $1 million of stock into a five-year GRAT at a time when the IRS hurdle rate is 5%. The annuity back to you works out at roughly $231,000 a year, which over five years returns your original $1 million plus the required interest, so there is no taxable gift going in. Now suppose the stock actually grows at 12% a year. After the five years of annuity payments have been made, roughly $295,000 is left in the trust, and that passes to your beneficiaries free of gift and estate tax. You have had your million back, and your family has the upside.
Change the assumptions and the number changes with them. A flat asset leaves nothing behind; a strongly performing one leaves a great deal. That is the whole design.
What Else Does a GRAT Require?
A GRAT is a complex trust and should only be handled by attorneys who do this work regularly. There are many technical requirements whenever estate and gift taxes are involved. Beyond drafting the document itself, there are practical requirements:
- Only the grantor can receive annuity distributions during the annuity term.
- The annuity payments must be made at least annually.
- When the annuity term ends, the remaining assets pass to the beneficiaries, either outright or in trust. No additional contributions to the trust are permitted.
- The grantor must outlive the annuity term for the trust to work. This is why shorter terms are usually safer, and one reason the two-to-five-year range is typical.
How Does the Annuity Part Work?
Once the asset is in the trust, annuity payments must be made back to the grantor. An annuity here is simply a schedule of payments based on the value of the original asset. The trust must pay the grantor at a rate of interest at least as high as the rate the IRS sets. If the annuity payments over the term add up to the value of the original asset plus that interest, the transfer into the trust is not a gift, because what goes in matches what comes back out. The appreciation beyond that stays in the trust and passes to the beneficiaries free of estate and gift tax.
That Sounds Technical. Is It Worth It?
That depends on what you own and how it is likely to perform, which is a conversation to have with your estate planning attorney. But in the example above, a few hundred thousand dollars moved to the next generation without estate or gift tax. In Massachusetts, where the estate tax threshold is $2 million, that can make a real difference to what your beneficiaries pay.
There are other technical aspects to the trust, and your estate planning attorney should be able to tell you whether a GRAT fits your situation. If your estate planning attorney does not know what a GRAT is or how one works, find a new estate planning attorney.
If you hold something you expect to grow, a business, a concentrated stock position, crypto, it is worth finding out whether a GRAT belongs in your plan.
Book a free 15-minute consult call with our Lead Intake Coordinator, Nicole Ott, or give us a call at 978-657-7437. There is no charge and no pressure, the goal is simply to work out what your family actually needs to do next.
You can also download our free report, 5 Trusts That Can Wreck Your Estate Plan.
