Wealthy families that want to pass on assets they expect to significantly increase in value may want to consider a grantor retained annuity trust (GRAT).
A GRAT is a type of irrevocable trust that makes regular annuity payments from assets transferred to the trust creator or grantor. What’s left after the trust’s term is passed on to heirs, without certain taxes.
Considering fears of a bear market and recession, assets in a GRAT could be given time to appreciate as the market recovers. But GRATs can be complex structures. So let’s take a closer look.
How Do GRATs Work?
Once you create a grantor-retained annuity trust (GRAT), you can transfer investable assets to the trust, such as shares of a family business, stocks, and real estate. You also set up a trust term, which typically lasts two to 10 years. Over the term of the trust, you receive the principal back plus interest in the form of annual annuity payments.These annuity payments are calculated using the IRS Section 7520 rate, or “hurdle rate.” This rate changes monthly based on various economic factors. The purpose of a successful GRAT is for the assets in the GRAT to appreciate by more than the hurdle rate in place when the trust was funded. To visualize a successful GRAT, let’s consider one with the following points.
- Initial transfer to GRAT: $1 million worth of stocks
- Term: 3 years
- Hurdle rate: 3 percent
- Stock returns: 8 percent
How? It has to do with how the IRS defines gift value. The gift value is equal to the value of assets contributed minus the value of annuity retained. In a well-structured GRAT, you’d get close to the entire assets transferred back via annuity payments, making the actual gift value close to zero. The assets’ appreciation then flows to heirs, and no gift tax is due at the time of the transfer. And the transfer doesn’t use any of your lifetime gift and estate tax exemption of $13.99 million for individuals in 2025.
Risks of Creating a GRAT
There’s a survivability risk when it comes to GRATs. If you pass away before the GRAT’s term ends, all its assets and any appreciation go back into your estate and could thus be subject to estate taxes. Plus, a GRAT is most successful when you transfer assets that appreciate significantly in value—particularly above the hurdle rate set at the time of the GRAT creation. Luckily, GRATs are quite customizable. You can remove assets from the GRAT and replace them with those that have more growth potential. In times of historically high market returns, you could also replace the assets with cash or something else that would be less prone to volatility.Meanwhile, tax laws—particularly those surrounding estate planning—may change drastically.
For instance, the current lifetime gift and estate tax exemption levels were made possible by the Tax Cuts and Jobs Act (TCJA) signed into law by President Donald Trump during his first term. Without an action by Congress, the lifetime gift and estate tax exemption reverts to an estimated $7 million in 2026. This could put more estates into the estate tax territory. But there are several ways to shield yourself from estate taxes.
Types of Trusts
Many trusts are designed to shield assets from estate taxes. Here are some examples.Irrevocable Trust: This trust effectively removes assets from your taxable estate for the benefit of the heir or heirs. Once transferred, you can’t take the assets back, and the beneficiaries generally can’t be changed. However, assets like investments can continue to grow.
Irrevocable Life Insurance Trust: This kind of trust owns permanent life insurance policies and removes death benefits from your taxable estate. Additionally, the trust can protect a beneficiary’s access to government aid like Social Security disability income and Medicaid.
Qualified Personal Residence Trust: This trust allows you to transfer a primary residence to an irrevocable trust, removing the property’s current value and future appreciation from your estate. You’re allowed to live in the property for a specific number of years before it’s transferred to beneficiaries.
The Bottom Line
A GRAT is one of various trusts that can be a part of an effective estate planning strategy. The goal of a GRAT is to transfer assets that would grow significantly in value so that appreciation can transfer to beneficiaries free of gift and estate taxes.The Epoch Times copyright © 2025. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
