What Is a Grantor Retained Annuity Trust, or GRAT?
A grantor retained annuity trust, or GRAT, can help you transfer wealth to heirs while reducing your tax liability.
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What is a grantor retained annuity trust, or GRAT?
A GRAT is an irrevocable trust that allows the trust’s creator — known as the grantor — to put certain assets into a trust and freeze their value so that any future capital gains aren’t part of the grantor’s estate and the grantor’s heirs can inherit the assets with less estate or gift tax liability .
During the term of the GRAT, the trust pays an annuity to the grantor. This feature allows the GRAT to avoid triggering gift tax. The rest of the assets go to the beneficiaries, reducing the size of the grantor’s estate and future estate taxes .
How a GRAT works
Here’s an overview of the GRAT strategy:
- The grantor forms a GRAT by transferring assets, particularly those with high appreciation potential, to an irrevocable trust for a set period of time.
- The GRAT’s value is split into two parts: the annuity stream and remainder interest. Often, the value of the annuity stream is set to equal the value of the assets transferred into the GRAT to construct a “zeroed-out" GRAT. The IRS factors for valuing annuities, life estates and remainders influence the size of the annuity payments.
- The grantor receives annuity payments from the GRAT. The trust is expected to produce a minimum return of at least the IRS Section 7520 interest rate (usually in the 4% to 6% range). If it doesn't, the trust uses some of the principal to make the annuity payment. In that case, the GRAT “fails,” meaning it is returning the original assets back to the grantor .
- If the assets in the GRAT generate rates of return that surpass the Section 7520 rate during the fixed time period, the assets and accumulated asset growth typically go directly to beneficiaries gift-tax-free after the final annuity payment is made.
Pros and cons of a GRAT
Pros
May reduce estate taxes
Can mitigate future taxes on assets likely to appreciate
Flexibility
Cons
Interest rate risk
Mortality risk
Legal risk
Requires time and money to set up
Benefits of a GRAT
Can reduce taxes on future assets. Estate tax only applies to large estates. The federal estate tax ranges from 18% to 40% and generally only applies to assets over $13.99 million in 2025 or $15 million in 2026. People with estates large enough to trigger federal or state estate taxes may prefer to put assets with greater potential for appreciation into a GRAT — stocks, shares of startup companies, business ownership and real estate are common contenders for a GRAT. This strategy could keep the taxable appreciation out of the grantor's estate and increase the amount they leave to heirs.
Flexibility. Grantors can exchange the assets in a GRAT with other assets of equal value. This is helpful because if the trust assets aren't generating high enough returns, the grantor can replace them with other assets. Likewise, if the assets in the trust are performing very well and surpass the amount the grantor planned to give to heirs, slower-growing assets can be subbed in to tamp down appreciation .
Disadvantages of a GRAT
Interest rate risk: GRATs work best when interest rates are low. That’s because the minimum required annuity payments from a GRAT are based on the IRS Section 7520 hurdle rate. Low rates make it easier for the assets in the trust to produce a return above the Section 7520 rate.
Mortality risk. If the grantor dies before the end of the GRAT term, the trust assets go back into the grantor’s estate, making them subject to estate tax. Often, grantors elect shorter terms for the GRAT (two to three years) to help reduce this risk. Some even use the annuity payments from one short-term GRAT fund a new GRAT, so if the grantor dies, only the assets in the active GRAT revert to the estate .
Legal risk. Grantors should stay aware of the legislation surrounding GRATs. Because GRATs help people eliminate or reduce estate and gift tax, legislators frequently propose increasing restrictions, requiring longer fixed terms or eliminating the zeroed-out GRAT strategy.
Time and complexity. As with any irrevocable trust, expert guidance will ensure that establishing a GRAT doesn’t create unintended consequences. Be sure to consult a financial advisor and an estate planning attorney to determine the ideal terms for your situation.
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- 1. Cornell University Legal Information Institute. Grantor-retained annuity trust. Accessed Nov 25, 2025.
- 2. J.P.Morgan Wealth Management. What are grantor retained annuity trusts (GRATs)?. Accessed Nov 25, 2025.
- 3. Brown Brothers Harriman & Co. . When to freeze a failing GRAT. Accessed Nov 25, 2025.
- 4. Cornell Legal Information Institute. grantor-retained annuity trust. Accessed Nov 25, 2025.
- 5. Fidelity Wealth Management. Using a GRAT for tax-efficient wealth transfer. Accessed Nov 25, 2025.
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