11 Aug GRATs: How Wealthy Families Transfer Millions at a Fraction of the Gift Tax Cost
A couple with a combined estate of $50 million faces a problem. The federal estate tax exemption is $15 million per person, $30 million for a married couple. The One Big Beautiful Bill Act made that number permanent (at least until Congress decides to change it). The $20 million above the exemption is exposed to a 40% federal estate tax. That is $8 million the family will owe the IRS when the second spouse dies.
A Grantor Retained Annuity Trust, or GRAT, is one of the most effective ways to move that excess wealth out of the estate at little or no gift tax cost. It’s legal and well established. It’s been used by families and businesses of every size for decades. And it works best when interest rates are low and the assets inside the trust are expected to grow.
How a GRAT Works
You transfer assets into an irrevocable trust. The trust pays you back a fixed annuity over a set number of years, typically two to three. At the end of the term, whatever is left in the trust passes to your beneficiaries, usually your children or a trust for their benefit.
The IRS calculates the taxable gift based on the value of what you put in, minus the value of the annuity payments you receive back. If you structure the annuity payments to equal the original contribution plus an assumed interest rate (the IRS Section 7520 rate), the taxable gift is zero or close to it. This is called a “zeroed-out” GRAT.
The bet is simple. If the assets inside the GRAT grow faster than the 7520 rate, the excess growth passes to your beneficiaries free of gift and estate tax. If the assets grow at exactly the 7520 rate, nothing transfers but nothing is lost either. You get your annuity payments back and you can try again.
Why GRATs Still Matter After OBBBA
Some advisors have suggested that the permanent $15 million exemption makes GRATs unnecessary. That’s wrong for two reasons.
First, for families with assets that exceed the $30 million combined threshold, GRATs remain a viable planning tool to consider. A business owner whose company is worth $25 million, combined with a home, investments, and retirement accounts, is well above the line. For these families, every dollar moved out of the estate through a GRAT is a dollar that avoids the 40% tax.
Second, state estate taxes hit at much lower thresholds. For example, New York, Massachusetts, and several other states have their own exemptions, and most of them are far below the federal number. A GRAT that moves growth assets out of the estate can reduce both federal and state exposure.
What Makes a Good GRAT Asset
GRATs work best with assets that are expected to appreciate. The more the assets outperform the 7520 rate, the more wealth shifts to the next generation tax-free. Good GRAT assets include closely held business interests that are growing, real estate with upside, and investment portfolios with concentrated positions that may increase in value.
Bad GRAT assets include cash, bonds, and anything expected to produce steady but modest returns. If the assets grow at or below the 7520 rate, the GRAT doesn’t transfer anything. It’s not a loss, because you get your annuity payments back. But it is a missed opportunity.
The Rolling GRAT Strategy
While you can create a single GRAT, one way to increase tax savings is by creating a series of short-term GRATs, typically two years each, that “roll” one into the next. If the first GRAT works, the excess growth is out of the estate. If it doesn’t, the assets come back and go into the next GRAT. This approach gives you multiple bites at the apple without any downside risk.
Depending on interest rates, assets in the trust, and other factors, a rolling GRAT strategy can transfer millions over a decade. The cost is the legal and administrative fees to set them up and run them. Compared to the estate tax saved, those fees are negligible.
GRATs, SLATs, and IDGTs: The Advanced Toolkit
GRATs are one tool in a larger toolkit. Spousal Lifetime Access Trusts (SLATs) let you move assets out of your estate while your spouse retains access to them. Intentionally Defective Grantor Trusts (IDGTs) let you sell assets to a trust in exchange for a promissory note, shifting growth out of the estate while you pay the trust’s income tax, further reducing your taxable estate. These tools work alongside the trust-based estate plan we describe here.
Which tools to use depends on the size of the estate, the type of assets, the family structure, and the client’s goals. A family with $35 million and a growing business needs a different combination than a family with $60 million and a diversified portfolio. The strategy should be built around the family, not around the tool.
Related Reading
Estate Planning for Business Owners. Business owners face unique succession and tax challenges that require coordinated planning.
Trusts: Revocable vs. Irrevocable. GRATs are irrevocable trusts. Understanding the difference between revocable and irrevocable is the starting point.
Trusts vs. Wills. Why trust-based planning is the foundation for families with significant wealth.
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