Grantor Retained Annuity Trust (GRAT)
What is it?
A GRAT is an irrevocable trust where the grantor transfers appreciating assets and retains an annuity payment for a set term. At the end of the term, remaining assets pass to beneficiaries with minimal or zero gift tax. The "trick" is that if the assets grow faster than the IRS assumed rate (Section 7520 rate), the excess growth passes tax-free to beneficiaries.
Why is it important?
GRATs are one of the most powerful wealth transfer tools available. They allow you to transfer appreciating assets—stocks, business interests, real estate—to the next generation with minimal gift tax cost. A "zeroed-out" GRAT can be structured so the gift tax value is essentially zero, while potentially transferring millions in appreciation. Used extensively by wealthy families and tech founders.
Example Language
The Grantor transfers $5 million in company stock to a 2-year GRAT. The Grantor receives annuity payments equal to the original value plus the IRS assumed interest rate. If the stock appreciates 30% during the 2-year term, approximately $1.5 million in appreciation passes to beneficiaries completely free of gift and estate tax.