A Grantor Retained Annuity Trust (GRAT) is one of the more effective tools for moving appreciating assets to the next generation without triggering gift or estate tax. If you’re holding a business, real estate, or pre-IPO equity that you expect to grow substantially, a GRAT lets that growth pass to your heirs while you keep your estate planning exemption intact.
Part of our guide: Retirement Planning.
How a GRAT Actually Works
You place appreciating assets into the trust, then receive fixed annuity payments back over a set term, usually a few years. Whatever is left in the trust when the term ends passes to your beneficiaries free of gift and estate tax.
The key number is the Section 7520 rate, a hurdle rate the IRS sets monthly, generally running between 1% and 4% in recent years. Any growth in the trust above that rate passes to your heirs tax-free; growth below it just comes back to you as annuity payments. As an illustration: if someone puts $5 million in startup equity into a two-year GRAT with a 3% hurdle rate, the trust pays back roughly $5.15 million over two years. If those shares happened to triple to $15 million, the beneficiaries would receive close to $10 million with no gift tax owed. That outcome depends entirely on the assets actually outperforming the hurdle rate, which is never guaranteed.
The Zeroed-Out GRAT
Most estate planning attorneys structure GRATs as “zeroed-out”: the annuity payments are set to equal the initial contribution plus the hurdle rate, which makes the calculated taxable gift essentially zero. That means you don’t use any of your lifetime gift tax exemption (currently $15 million per person) to fund the trust.
This creates a lopsided risk profile in your favor. If the assets underperform, you get everything back through the annuity payments, aside from legal fees, so there’s little downside. If the assets outperform, the excess passes to your heirs tax-free. That asymmetry is why tech founders with pre-IPO shares use GRATs so often: an equity stake that’s about to see a liquidity event is exactly the kind of asset a GRAT is built for.
Rolling GRATs and Timing
Rather than one long-term GRAT, many families set up a series of short-term GRATs, often two years each. Shorter terms capture appreciation faster and let you adjust if one trust underperforms, rather than being locked into a decade-long structure.
Timing is everything here. You want to fund a GRAT before the assets appreciate, not after. Events like an upcoming IPO, a pending business sale, or a real estate development that’s about to get more valuable are the moments to act. Age and health matter too: the grantor has to survive the trust term for the tax benefit to hold. If the grantor dies during the term, the assets go back into their estate for tax purposes, which is why older grantors generally favor shorter terms over longer ones.
Who Should Consider One, and the Mistakes to Avoid
GRATs work best for business owners with companies poised for growth, real estate developers in appreciating markets, and anyone holding pre-IPO equity. They’re not for everyone: cash and bonds don’t have the growth potential to make a GRAT worthwhile, and you want assets with a real catalyst for appreciation, not just optimism.
The most common mistakes are getting too aggressive with term length (raising mortality risk for no real benefit), assuming past growth will repeat, and waiting until after the assets have already appreciated to act, at which point most of the opportunity is gone. There’s also an ongoing administrative burden: annual valuations, tax filings, and precisely calculated annuity payments, all of which require a qualified estate planning attorney, tax advisor, and, for hard-to-value assets like private company stock or real estate, a professional appraiser. This isn’t a do-it-yourself strategy. If you’re sitting on an asset that’s about to take off, the time to talk to a professional about a GRAT is now, not after the value has already moved.
Educational only, not tax, legal, or investment advice. Check primary sources and speak with a qualified professional before making financial decisions.
Part of our guide: Crypto Estate Planning.
