A Grantor Retained Annuity Trust (GRAT) is an irrevocable trust that pays the person who funded it a fixed annuity for a set number of years and passes any growth above an IRS-assumed interest rate to the beneficiaries free of gift and estate tax.
In plain terms
It is a bet against a government interest rate. You put an asset into a trust, the trust pays you back the value of that asset plus a required rate of return over a few years, and whatever the asset earned beyond that required rate stays in the trust for your children. If the asset does nothing, you get everything back and have lost only the legal fees. If it doubles, a large amount of money has moved to the next generation without using any estate tax exemption.
How it works
The grantor transfers an asset into the trust and retains the right to a fixed annuity for a stated term — often two or three years. The IRS values the gift as the asset’s value minus the present value of that retained annuity stream, discounted at the Section 7520 rate, published monthly.
If the annuity is set so that its present value equals the asset’s full value, the taxable gift is approximately zero. This is a zeroed-out GRAT, and it is the standard design: nothing is reported as a gift, no exemption is consumed, and the only downside is transaction cost.
Two things can go wrong. If the asset underperforms the 7520 rate, the annuity payments simply return everything to the grantor and the trust ends with nothing — a failure that costs the fees and nothing more. If the grantor dies during the term, the assets are pulled back into the taxable estate and the strategy is undone entirely. This is why short terms are common: they minimize mortality risk, and practitioners often run a series of short, overlapping GRATs rather than a single long one.
The numbers
- Section 7520 rate, August 2026: 5.20%. This is the hurdle the asset must beat.
- Typical term: 2–3 years, chosen to limit mortality risk.
- Taxable gift in a zeroed-out GRAT: approximately $0.
- What passes to heirs: the asset’s total return minus the 7520 rate, compounded over the term.
- Downside if the asset underperforms: the cost of drafting and administration. The principal returns to the grantor.
- Best-suited assets: volatile or pre-liquidity holdings — pre-IPO shares, a concentrated stock position, a business interest ahead of a sale.
What people get wrong
That GRATs are a tax shelter with a catch. There is no catch on the downside — a failed GRAT costs almost nothing beyond fees, which is why they are used repeatedly and in series. The real limits are elsewhere: the strategy is useless in a high-rate environment against a slow-growing asset, it is fully undone if the grantor dies mid-term, and it transfers growth rather than principal, so it does nothing for a household whose problem is the size of the base rather than its trajectory. It also does not remove the income tax: a GRAT is a grantor trust, so the grantor keeps paying tax on the trust’s income — which practitioners treat as a feature, since paying someone else’s tax bill is itself a tax-free transfer.
Related
Read more: Trusts: How Wealth Is Held, Protected, and Passed On · Inheritance: The Transfer of Wealth Between Generations · Generational Wealth: How Long Fortunes Actually Last
See also: Irrevocable trust · Grantor trust · Estate tax exemption