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A GRAT is a legal trust you set up during your lifetime. You put assets into the trust and receive annuity payments back for a set number of years. When the trust ends, whatever is left goes to your heirs free of gift and estate tax. If the assets grow faster than the IRS interest rate, your heirs get that extra growth at no tax cost to you.
GRATs have been used by some of the wealthiest families in the country to move billions of dollars out of taxable estates. But they are not just for billionaires. Anyone with appreciating assets and an estate that may be subject to federal estate tax can benefit from the strategy.
How a GRAT Works
Here is the basic structure:
- You transfer assets into the GRAT — typically stocks, a business interest, or real estate.
- The trust pays you fixed annuity payments over the trust term (usually two to ten years).
- The IRS uses a benchmark rate called the Section 7520 rate (also called the hurdle rate) to calculate the taxable gift at the time you fund the trust. If you structure the annuity correctly, the taxable gift is close to zero.
- At the end of the term, the remaining assets pass to your heirs or into a family trust with no additional gift or estate tax.
The key: if the assets in the GRAT grow faster than the Section 7520 rate, that excess growth transfers to your heirs tax-free. In a low-rate environment, even modest growth beats the hurdle.
The Section 7520 Rate
The IRS publishes a new Section 7520 rate each month. As of May 2026, the rate is approximately 5.0%. This means your assets need to grow faster than 5.0% annually during the GRAT term for any value to pass to heirs.
GRATs work best when:
- Interest rates are low (lower hurdle rate = easier to beat)
- The assets you put in are expected to appreciate significantly
- You are funding the trust right before a major liquidity event — a company IPO, for example
Zeroed-Out GRAT
The most common form is the zeroed-out GRAT. You structure the annuity payments so that the present value of those payments equals the full value of what you put into the trust. The taxable gift is zero (or very close to it). You use up no lifetime gift tax exemption.
If the trust assets grow faster than the 7520 rate, the excess goes to your heirs tax-free. If the assets do not beat the hurdle rate, the assets simply come back to you through the annuity payments. You are no worse off than if you had done nothing — except for legal fees.
This asymmetric risk profile is why GRATs are so popular. The downside is limited; the upside can be enormous.
Rolling GRATs
Some estate planners recommend “rolling” GRATs — short-term trusts (often two years) that are reset repeatedly. When the first GRAT ends, you roll the assets into a new GRAT. This strategy:
- Locks in gains from periods of strong performance
- Reduces the risk that a market decline will wipe out the strategy
- Keeps the hurdle rate short and manageable
The downside of rolling GRATs is administrative cost — each new trust requires legal setup.
What Assets Work Best in a GRAT
Not all assets are equally good candidates for a GRAT. The best are those with high expected growth or short-term appreciation events:
- Pre-IPO stock: If you hold shares in a company about to go public, a GRAT funded right before the IPO can move the post-IPO gain to heirs tax-free.
- Volatile stock: The optionality of the strategy benefits from volatility. If the stock surges, heirs get the gain. If it tanks, it comes back to you.
- Business interests: Minority interests in private businesses, which already carry valuation discounts, work well.
- Real estate with growth potential: Works, though harder to value and less liquid for annuity payments.
Assets that do not work well: cash (grows too slowly to beat the hurdle), bonds (same issue), and deprecating assets.
GRAT vs. Other Estate Planning Strategies
GRATs are one of several techniques for moving wealth out of your estate. Here is how they compare to common alternatives:
| Strategy | How Wealth Transfers | Gift Tax Risk | Requires Surviving Term |
|---|---|---|---|
| GRAT | Growth above 7520 rate | Low (zeroed-out) | Yes |
| IDGT (Intentionally Defective Grantor Trust) | Full asset value | Uses exemption | No |
| Outright gift | Full asset value now | Uses exemption | No |
| QPRT | Home equity at discount | Low | Yes |
The GRAT’s main weakness: if you die during the trust term, the assets come back into your estate. This is the “mortality risk.” Short-term GRATs (two to three years) reduce this risk.
Tax Treatment
During the GRAT term, you pay income tax on all income and gains generated by the trust assets. This sounds like a disadvantage, but it is actually a feature. Every dollar of tax you pay on behalf of the trust is an additional tax-free transfer to your heirs (because the trust does not shrink from the tax bill).
When the trust terminates and assets pass to heirs, the heirs receive the assets at the grantor’s original cost basis. There is no step-up in basis at the end of the GRAT term. This is different from assets inherited at death, which typically get a stepped-up basis.
How to Set Up a GRAT
GRATs are not a DIY project. You need:
- An estate planning attorney to draft the trust document. This typically costs $3,000–$10,000 depending on complexity.
- A CPA or tax advisor to handle the gift tax return (Form 709) filed in the year you fund the trust.
- A trustee — can be a professional trustee or a trusted family member (not you, as the grantor).
- A qualified appraiser if you are funding with non-publicly-traded assets.
The total cost to set up a GRAT can run $5,000–$20,000 for a sophisticated transaction. Rolling GRATs add ongoing costs each cycle.
Who Should Consider a GRAT
A GRAT makes sense if:
- Your estate is large enough to face federal estate tax (over $13.6 million per person in 2026, though this exemption may drop after 2025 law changes)
- You have assets with high expected near-term appreciation
- You are in good health (mortality risk matters)
- You do not need the assets for yourself — the annuity payments come back, but the growth goes to heirs
GRATs are less useful for smaller estates well under the exemption amount, for people in poor health, or for assets expected to grow slowly.
Legislative Risk
Congress has proposed changes to GRAT rules multiple times, including requiring a minimum taxable gift (eliminating zeroed-out GRATs) and minimum trust terms. None of these proposals have passed as of May 2026, but the strategy’s future is not guaranteed. If you are planning to use a GRAT, sooner is generally safer than later.
FAQ
What is a GRAT in simple terms?
A GRAT is a trust you fund with assets. You receive fixed annuity payments back over a set number of years. When the trust ends, any growth above the IRS hurdle rate goes to your heirs without gift or estate tax.
What happens if I die during the GRAT term?
If you die before the trust ends, the assets come back into your taxable estate. This is called mortality risk. Shorter trust terms (two to three years) reduce this risk.
How much does it cost to set up a GRAT?
Expect $5,000 to $20,000 in legal and professional fees. Rolling GRATs add ongoing costs each cycle, but the potential estate tax savings often far outweigh the setup cost.
Is a GRAT the same as an irrevocable trust?
Yes. A GRAT is irrevocable. Once you fund it, you cannot take the assets back. Only the scheduled annuity payments return to you.
Do GRATs still work in 2026?
Yes. As of May 2026, GRATs remain a valid estate planning strategy. Congress has proposed restrictions but none have passed.
Rates as of May 2026. Section 7520 rates change monthly. Consult an estate planning attorney before implementing any trust strategy.
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