GRATs: Passing Appreciation to Heirs Tax-Free
A grantor retained annuity trust lets you move an asset's future growth to your heirs with little or no gift tax. Here's the mechanism.
What a GRAT does
A grantor retained annuity trust (GRAT) is a short-term irrevocable trust you fund with an asset, in exchange for an annuity paid back to you over a fixed term. Whatever the asset earns above a government-set hurdle rate passes to your heirs — often with little or no gift tax. The GRAT Calculator estimates that tax-free transfer.
It is one of the most reliable estate-planning techniques precisely because it is sanctioned by the tax code and the IRS's own assumptions, not an aggressive loophole.
The hurdle rate is everything
When you fund a GRAT, the IRS assumes the assets will grow at the §7520 rate (a monthly published rate). The annuity is sized so that, at that assumed rate, nothing is left for heirs — making the taxable gift essentially zero. This is called a 'zeroed-out' GRAT.
If the assets actually outperform that hurdle, the excess growth passes to your heirs free of additional gift or estate tax. If they merely match or underperform the hurdle, the GRAT simply returns everything to you — so the downside is limited to setup costs. The spread between your asset's growth and the §7520 rate is the entire game.
Why short terms and volatile assets work best
GRATs shine with assets poised for sharp appreciation — pre-IPO stock, a recovering position, or a concentrated equity holding. The bigger the outperformance over the hurdle, the more passes to heirs.
Many advisors use a series of short, rolling two-year GRATs ('rolling GRATs') to capture volatility: a year of strong returns locks in a transfer, while a poor year just resets with no harm done. The calculator lets you test different terms and growth assumptions to see the effect.
The mortality risk
There is one key catch: you must survive the GRAT term. If you die before it ends, much or all of the trust assets are pulled back into your taxable estate, undoing the benefit. This is why GRAT terms are usually kept short and why they suit healthy grantors.
Because of this, GRATs are often paired with other tools and revisited regularly as part of a broader plan.
Getting one set up
GRATs require careful drafting, accurate valuation of the contributed asset, and proper gift-tax reporting on Form 709. The annuity payments must actually be made on schedule, in cash or in kind.
This is firmly attorney territory — the documents and the valuation drive whether the strategy holds up. A fiduciary advisor can help select which assets to contribute and manage the trust's investments during the term.
Read the full guide