The Federal gift and estate tax exemption (also known as the “basic exclusion amount”) increased to $15,000,000 per individual for calendar year 2026. Taxpayers whose assets are subject to gift or estate tax despite the increased exclusion amount still have tax planning strategies to consider. A grantor retained annuity trust, or GRAT, allows individuals to implement an estate tax planning strategy even if they have already used their basic exclusion amount.
What is a GRAT?
A GRAT is an estate planning tool that can allow a grantor to transfer future appreciation on assets to named beneficiaries while utilizing little to no gift tax exemption. To implement a GRAT, the grantor creates the trust and funds it with assets expected to appreciate beyond a set hurdle rate (determined by the IRS) over a period of time established in the GRAT. The grantor receives an annuity payment from the GRAT until the GRAT term ends. During the GRAT term, assets that are not distributed to the grantor as annuity payments remain in the GRAT to pass to the remainder beneficiaries at the end of the term. Generally, the greater the assets grow beyond the hurdle rate, the more that can be passed to the remainder beneficiaries.
When GRATs are Most Effective
GRATs are typically most successful when the hurdle rate is low and high-appreciating assets are utilized. When the hurdle rate is low, it is easier for the return on the assets in the trust to exceed the hurdle rate. GRATs are easiest to administer when the assets are easy-to-value, since the grantor’s annuity can be determined more quickly and assuredly.
A GRAT is not typically the most efficient mechanism for individuals focused on generation-skipping transfer tax planning. However, GRATs can be an effective technique for individuals with taxable estates exceeding their available gift and estate tax exemption.
Example of the GRAT Structure
The basic GRAT structure is outlined in this high-level example: Beth transfers appreciating securities worth $1,000,000 to a GRAT with a six-year term. Beth retains the right to an annual annuity during the term. Beth names her child, Tom, as the remainder beneficiary. The hurdle rate is 4.6%. Beth receives an annuity payment of approximately $195,000 per year, which totals $1,170,000 in annuity payments during the six-year term. The securities grow in value by 10% annually. Tom receives approximately $270,000 at the end of the six-year term. Beth did not make a gift to the GRAT, and the assets received by Tom will not be included in Beth’s estate.
Limitations and Considerations
There are several requirements to correctly establish and administer a GRAT to attain the potential benefits. A GRAT’s success depends on a variety of factors, including the rate and timing of investment growth, the annuity payment structure, and the length of the GRAT term. GRATs are often most appropriate for individuals with assets likely to appreciate significantly or estates already exceeding the available exemption. Because GRAT effectiveness depends heavily on interest rates and legislative conditions, now may be an opportune time to evaluate whether a GRAT structure aligns with your overall estate planning strategy.
