A Grantor Retained Annuity Trust (GRAT) can be a powerful estate planning strategy for families whose assets exceed federal or state estate tax exemptions. By transferring appreciating assets into an irrevocable trust while retaining fixed annuity payments for a set term, a properly structured GRAT may allow future appreciation to pass to beneficiaries with little or no gift tax cost.

The strategy centers on the IRS Section 7520 rate. When a GRAT is structured as a “zeroed-out” GRAT, the retained annuity is designed to reduce the taxable gift to zero or close to zero. If the assets held by the GRAT appreciate faster than the applicable 7520 rate, that excess growth can ultimately pass to beneficiaries free of additional gift and estate tax. If the assets fail to outperform the rate, the grantor generally receives the assets back through the annuity payments, creating an opportunity to consider trying the strategy again.