Using Grantor Retained Annuity Trusts (GRATs) to Transfer Wealth and Minimize Taxes

Grantor Retained Annuity Trusts (GRATs) offer a strategic way to transfer future asset growth to your heirs while managing or eliminating gift taxes. While the structure has been around for decades, it continues to be a practical tool for families with significant assets.

What is a GRAT
A GRAT is an irrevocable trust that lets you move appreciation out of your estate. You contribute assets for a set number of years and receive fixed annuity payments. At the end of the term, any remaining value is passed to your beneficiaries, typically with no gift tax. When structured as a “zeroed-out GRAT,” the payments you receive are designed to equal the full value of what you put in, leaving no taxable gift.

Why consider a GRAT
If you expect an asset—such as private business shares or real estate—to increase in value, a GRAT may allow you to pass that appreciation to your heirs without using your lifetime exemption. As long as the asset grows faster than the IRS’s assumed rate of return, the difference can transfer tax-free.

Key considerations
You retain the right to receive annuity payments throughout the term. The growth beyond those payments passes to beneficiaries. You are responsible for paying the income tax on the trust’s earnings. Properly structured, GRATs do not consume any of your gift or estate tax exemption.

What are the risks
If you pass away during the GRAT term, the assets return to your estate and may be taxed. If the assets lose value or grow too slowly, there may be little or no remainder for your heirs. Legislative changes could also impact the future benefits of GRATs.

Is a GRAT right for you
GRATs work best for individuals with high-growth assets and a desire to reduce future estate taxes. If you’re looking to preserve wealth across generations, this approach may be worth discussing with your estate planning and tax advisers.