Grantor Retained Annuity Trust (GRAT): What It Is and Who Needs One

If you think trusts are only for billionaires or fancy lawyers, you're not alone. A lot of people believe estate planning only matters if you’re sitting on millions. But the truth is, tools like Grantor Retained Annuity Trusts—also called GRATs—can help regular families, too.

Whether you own a growing business, have stock you expect to increase in value, or just want to lower future taxes for your kids, a GRAT might be worth looking into. Let’s break it down in simple terms so you can decide if this estate planning tool fits your situation.

What Is a GRAT (Grantor Retained Annuity Trust)?

A Grantor Retained Annuity Trust (GRAT) lets you move assets—like stocks or real estate—into a trust while still receiving yearly payments from it. You’ll get those payments for a set number of years. After that time ends, anything left in the trust goes to your chosen beneficiaries, usually your kids or a trust for their benefit. This strategy can help reduce or even avoid gift and estate taxes on the assets’ appreciation (growth in value) during the trust period.

GRATs are often used for assets that are expected to go up in value. For example, Mark Zuckerberg placed shares of Facebook into a GRAT before the company went public. Because the shares grew in value, he was able to pass that growth on without extra taxes. That’s a big reason why GRATs are so popular.

What’s a “Zeroed-Out” GRAT?

A “zeroed-out” GRAT is the most common way to structure this type of trust. In this setup, you structure the trust so that the value of the annuity payments you receive equals the value of what you put in. This way, all appreciation of the assets in the trust may go to your beneficiaries tax-free.

How Does a GRAT Work?

When you put assets into a GRAT, the IRS uses the value of those assets at the time you fund the trust to determine how the trust will be taxed. You get payments back each year for a certain period, and then anything left in the trust goes to your beneficiaries—with little to no gift or estate taxes—as long as you set up the trust correctly and you outlive the term. Let’s walk through some of the key terms and ideas so you know what everything means.

Annuity Payments

Annuity payments are the fixed payments you receive from the trust each year. The IRS sets a monthly interest rate, called the “hurdle rate,” which is used to calculate how much growth must occur before any value passes to beneficiaries tax-free.

You can receive annuity payments in cash or other assets like stock, but not with something like a promissory note, which is considered a “debt instrument.” That means it’s a promise to pay back money later, which isn’t allowed.

One common misconception about how a GRAT works is that the annuity payments are the same every year. However, they can actually go up by as much as 20% each year. Starting with smaller payments and increasing over time means more money stays in the trust in the early years, giving it a chance to grow faster and create more value later on.

GRAT Term

The GRAT term is how long you receive payments before the rest of the trust goes to your beneficiaries. The shortest term allowed is two years, but many people choose terms of five, seven, or even ten years. Choosing the right term depends on your age and how fast you think the trust assets will grow.

Another option is to use a series of short-term GRATs, known as “rolling GRATs.” This strategy keeps the assets in a trust for longer, just not the same trust. It also gives you more control if the IRS’s hurdle rate drops, which can help the trust gain more value over time. An estate planning attorney can help you determine the right annuity and term for your GRAT.

Asset Distribution

When the GRAT term ends, whatever’s left in the trust goes to your beneficiaries. Most of the time, the beneficiaries are your children, so make sure they know what a GRAT is and when to expect the proceeds.

The distribution can happen right away, or the money can be held in a separate trust for them, especially if they’re younger or not ready to manage it yet. If a trust is the beneficiary, it will follow the rules you set when creating it.

For a GRAT to work as intended, the assets in the trust generally must grow faster than the set IRS interest rate. Otherwise, the tax benefits may be limited.

Benefits of Grantor Retained Annuity Trusts

A GRAT can be a powerful tool in the right situation. Here are a few of the key benefits:

• Skip gift and estate taxes: If the assets grow in value, that growth is protected from estate taxes and gift taxes.
• Protect your lifetime exemptions: A zeroed-out GRAT doesn’t use up your gift or estate tax exemption, which means you still have that available for other gifts.
• Income tax perks: You pay the income taxes on the trust, not your heirs. That lowers the value of your estate while helping your beneficiaries in the future.

Disadvantages of Grantor Retained Annuity Trusts

Like any legal tool, GRATs have some downsides to think about. Here are a few:

• Assets may become part of the taxable estate: If you pass away before the GRAT term ends, the trust assets go back into your taxable estate.
• Assets may not gain value: If your investments lose value or grow too slowly, the GRAT won’t give you the tax savings you hoped for.
• The rules may change: Lawmakers have talked about limiting GRATs. Right now, they’re legal and effective, but that could change in the future.

Who Needs a GRAT for Estate Planning?

You don’t need to be a billionaire to use a GRAT in estate planning. There are many different types of people who might want to consider one:

• People with startup stock: Assets like startup stock or early-stage investments can rise in value quickly, making timing and planning especially important.
• Business owners: Like startup stock, if you own a growing business, a GRAT can help move shares to your kids without paying large taxes.
• People with large estates: As of 2025, the federal estate tax exemption is approximately $13.99 million per person. However, that amount is scheduled to drop by about half in 2026 (unless Congress changes the law). This would mean the estate tax—and the need for tools like GRATs—will apply to a lot more people.
• People who used their lifetime exemptions: The gift and estate tax exemption is approximately $13.99 million per person, with an annual gift exclusion of $19,000 per recipient. If you’ve already used most or all of your exemption, a GRAT gives you another way to shift value to your heirs with little to no additional tax.

Talk to an Attorney About GRATs

The answer to “What is a GRAT?” can get complicated fast. Between IRS rules, trust terms, and choosing the right assets, it helps to have a professional guide you through it. An estate planning law firm like Plan Ahead Legal can walk you through the steps and help you build a plan that fits your needs. Contact us today for a free consultation so you can choose the right strategy for your situation.

FAQs

Can the Beneficiary of a GRAT Be a Trust?

Yes, the beneficiary can be another trust. This can help manage how and when your heirs receive the assets, especially if they’re young or need financial guidance.

Does a GRAT File a Tax Return?

No, the GRAT itself doesn’t file a separate tax return. Because it’s a “grantor trust,” the income goes on the grantor’s personal tax return.

What Assets Are Good for a GRAT?

GRATs work best with assets that are expected to grow in value, like startup stock, real estate, or shares in a family business. These assets can create the most tax savings if they appreciate during the trust term.