Grantor Retained Annuity Trusts (GRATS): Planning for High-Net-Worth Clients with Taxable Estates
A GRAT is a type of irrevocable trust in which a grantor transfers assets to the trust in exchange for annual annuity payments during a fixed term, with the remainder of the gift passing to the grantor’s beneficiaries and excluded from the donor’s estate.
The creation of a GRAT results in an immediate taxable gift of the remainder interest in the GRAT, the value of which is determined by subtracting the actuarial present value of the grantor’s retained interest (the stream of annuity payments), from the gift tax value of all property transferred to the trust.
Upon the donor’s death, the remainder of the gift to the beneficiaries is excluded from the donor’s estate, and all appreciation in the assets transferred escapes both gift and estate taxation.
Sounds good – what’s the catch? While a donor’s life expectancy is not a technical factor in the structuring of a GRAT, the possibility of a donor dying during the GRAT term is the biggest risk to this estate planning technique as a failure to outlive the GRAT term would bring all of the assets transferred to the trust back into the donor’s estate.
A GRAT is considered successful when a donor outlives the GRAT term and the assets transferred to the trust outperform the IRC Section 7520 rate, currently at 4.8% for March 2026. Higher interest rates mean a higher IRC Section 7520 rate. This results in higher annuity payments back to the donor and less wealth transferred to the next generation.
If you have a taxable estate of $15 million or more, establishing a GRAT or a series of “rolling GRATs” may be an appropriate estate planning technique to pass a considerable amount of wealth to the next generation while minimizing federal gift taxes. Consult with an estate planning attorney with solid tax expertise to discuss the options available to mitigate the 40% federal estate tax.
The lawyers at Beresford Booth have extensive experience working with estates of all sizes, including high-net-worth clients with large taxable estates. Contact us at info@beresfordlaw.com or (425) 776-4100 to see how we can help.