Grantor Retained Annuity Trust (GRAT)
A GRAT is an irrevocable trust where the grantor transfers assets and retains the right to receive fixed annuity payments for a specified term, with any appreciation above the IRS Section 7520 hurdle rate passing to beneficiaries gift-tax-free.
Exam Tip
GRAT = transfer appreciation ABOVE Section 7520 rate gift-tax-free. Zeroed-out GRAT = nearly $0 taxable gift. Grantor MUST survive term.
What is a GRAT?
A Grantor Retained Annuity Trust allows wealthy individuals to transfer appreciating assets to beneficiaries while minimizing gift taxes. The grantor receives fixed annuity payments for a specified term. If assets outperform the Section 7520 rate (~4.8% in 2025), excess growth passes tax-free.
How a GRAT Works
| Stage | What Happens |
|---|---|
| Funding | Grantor transfers assets |
| Annuity | Fixed payments for term |
| Remainder | Assets pass to beneficiaries |
GRAT Tax Mechanics (2025/2026)
| Component | Details |
|---|---|
| Section 7520 Rate | ~4.8% (2025) |
| Zeroed-Out GRAT | Nearly $0 taxable gift |
| Estate Inclusion | None if grantor survives term |
| Estate Exemption | $13.99M (2025), $15M (2026) |
Key Risks
- Grantor must survive term or assets included in estate
- Cannot allocate GST exemption during term (ETIP rules)
- Only works if assets outperform 7520 rate
Study This Term In
Related Terms
Irrevocable Trust
An irrevocable trust is a legal arrangement where the grantor permanently transfers assets out of their estate into a trust that generally cannot be modified, amended, or terminated, providing potential estate tax benefits and asset protection.
Qualified Personal Residence Trust (QPRT)
A QPRT is an irrevocable trust that transfers a personal residence to beneficiaries at a discounted gift tax value by retaining the right to live in the home for a specified term of years.
Unified Credit (Estate Tax Exemption)
The unified credit is a federal tax credit that exempts a specified amount of assets from estate and gift taxes during a person's lifetime and at death, set at $13.99 million for 2025 and $15 million for 2026 per individual.
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