Grantor Retained Annuity Trust (GRAT)

A Grantor Retained Annuity Trust (GRAT) is a type of irrevocable trust used in estate planning to transfer wealth to beneficiaries while minimizing gift and estate taxes. In a GRAT, the grantor transfers assets into the trust and retains the right to receive fixed annual payments, or “annuity payments,” for a specified term. At the end of the term, any remaining assets in the trust, after accounting for the annuity payments and the trust’s growth, are transferred to the beneficiaries without additional gift taxes.

The value of the gift for tax purposes is calculated based on the present value of the remainder interest at the time the trust is established, using an IRS-prescribed interest rate known as the Section 7520 rate. If the trust assets grow at a rate exceeding the Section 7520 rate, the excess growth passes to the beneficiaries tax-free. GRATs are often used to transfer appreciating assets, such as stocks or closely held business interests, in a tax-efficient manner.

A GRAT is particularly advantageous in low-interest-rate environments and for individuals who have volatile assets or assets expected to exceed the Section 7520 rate. However, to achieve the intended tax benefits, the grantor must outlive the trust term; otherwise, the trust assets may be included in their taxable estate.