Grantor Retained Annuity Trust (GRAT): Definition and Example

What Is a Grantor Retained Annuity Trust (GRAT)?

A grantor retained annuity trust (GRAT) is an estate planning tool used to minimize taxes on large financial gifts made to family members. It can avoid using much (if any) of the lifetime gift and estate tax exclusion provided by the Internal Revenue Service (IRS).

An irrevocable trust is created for a certain period in which assets are placed. An annuity is then paid out to the grantor each year. The beneficiary receives the assets and pays little or no gift taxes when the trust expires and the last annuity payment is made.

Understanding Grantor Retained Annuity Trusts (GRATs)

Two types of taxes can be imposed when an individual dies. The estate tax applies to the value of everything the decedent owned or had a financial interest in at the time of death. It's paid from the estate. Gift taxes are imposed on the value of anything given away during the decedent's lifetime for which they didn't receive payment or value in return.

These taxes share a lifetime exemption. The value of the estate is added to the value of taxable gifts made during the decedent's lifetime but tax isn't payable on the entire amount. The IRS provides a lifetime gift and estate tax exclusion that can be subtracted from the overall value.

This exclusion is $13.99 million in 2025, which is an increase from the $13.61 million exclusion in 2024. Gifts and an estate valued at $14 million would pay tax on only $100,000 in 2025 and $390,000 in 2024. Gifts and an estate valued at $13 million would not be liable for any of the tax at all.

A grantor retained annuity trust is a type of irrevocable trust that allows the individual who created it, referred to as the grantor or trust maker, to potentially pass a significant amount of wealth to the next generation with little or no gift tax cost.

GRATs are established for a specific number of years. The grantor transfers ownership of assets to a trust when creating a GRAT but they retain a right to receive the original value of the assets they've contributed. They can receive the value over the term of the GRAT while earning a rate of return known as the 7520 rate that's specified by the IRS.

The leftover assets are given to the grantor's beneficiaries when the GRAT's term expires. This is essentially any appreciation of the original assets minus the IRS-assumed return rate.

GRAT Risks

The annuity payments from a GRAT come from interest earned on the assets placed within the trust or as a percentage of the total value of the assets. The beneficiary receives nothing, however, if the individual who establishes the trust dies before it expires. The assets become part of the taxable estate of the individual in this case, effectively making the GRAT useless.

A successful GRAT also assumes that the assets appreciate so the GRAT doesn't work well if there's depreciation. There is also a risk with the IRS's 7520 rate. It's been so low in the millennium that it's reduced the ultimate advantage of using a GRAT.

GRAT Uses

GRATs are most useful to wealthy individuals who face significant estate tax liability at death. A GRAT may be used to freeze the value of their estate by shifting a portion or all of the appreciation onto their heirs. An individual could transfer the difference to their children tax-free if they had an asset worth $10 million but expected it to grow to $12 million over the next two years.

GRATs are especially popular with individuals who own shares in startup companies because stock price appreciation for IPO shares will usually far outpace the IRS assumed rate of return. More money can be passed to children without eating into the grantor's lifetime exclusion from estate and gift taxes.

GRAT History

GRATs saw a big surge in popularity in 2000 as a result of a favorable ruling in the U.S. Tax Court involving the Walton family of Walmart fame. The court ruled in favor of Walton's use of two GRATs in Audrey J. Walton v. Commissioner of Internal Revenue. Annuity payments were set up in the GRATs to return all the original assets to the grantor and leave only the appreciated value to beneficiaries.

The value of the gift originally placed in trust is reduced to zero in this way. Any remaining value in the trust is transferred to the beneficiary tax-free. This use of GRATs is known as a zeroed-out GRAT or Walton GRAT.

Example of a GRAT

Facebook founder Mark Zuckerberg put his company's pre-IPO stock into a GRAT before it went public. The exact numbers aren't known but Forbes ran estimated numbers and came up with an impressive figure as the value of Zuckerberg's stock: over $37.32 million.

The Bottom Line

A GRAT is a form of irrevocable trust that’s not intended to last through the lifetime of the person who establishes and funds it. GRATS have limited lifespans of a certain number of years. They can be used to transfer assets while minimizing gift tax liability. They’re often used by wealthy individuals whose assets are of a value that’s more than the lifetime estate and gift tax exclusion provided by the IRS. Always seek professional legal help if you’re thinking of setting up a trust, particularly an irrevocable trust. As the name suggests, you can’t easily undo a revocable trust if you later change your mind or make a mistake in its formation.