How does a GRAT save on gift taxes?

You transfer assets to the GRAT and receive annuity payments back over the trust term. The "gift" is only the difference between what you put in and the present value of payments you'll receive back. A "zeroed-out" GRAT is designed so the gift value is essentially zero.

What is the IRS hurdle rate?

The IRS uses the Section 7520 rate (updated monthly) as the assumed growth rate. Any growth above this rate passes to your heirs gift-tax-free. When rates are low, GRATs are especially powerful because it's easier to beat the hurdle.

What happens if I die during the GRAT term?

The trust assets are pulled back into your estate as if the GRAT never existed. This is the main risk - you need to survive the trust term for the strategy to work. Short-term GRATs (2-3 years) minimize this risk.

What assets work best in a GRAT?

Assets likely to appreciate significantly: stock before an IPO, real estate about to be developed, business interests expected to grow. The goal is to have the assets grow faster than the IRS hurdle rate.

Can I create multiple GRATs?

Yes - "rolling GRATs" are a common technique. You create a series of short-term (2-year) GRATs, rolling the assets from one to the next. This reduces the mortality risk and gives you multiple bites at outperforming the hurdle rate.

Estate Planning

Grantor Retained Annuity Trust (GRAT)

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advanced · $500K+

Transfer assets to GRAT, receive fixed annuity payments for term (typically 2-10 years).

If assets grow more than IRS hurdle rate (~5%), excess passes to heirs gift-tax-free.

Used by billionaires to transfer wealth.

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Key takeaways

You transfer appreciating assets to a GRAT and receive fixed annuity payments back for a set term.
Growth above the IRS Section 7520 hurdle rate passes to heirs gift-tax-free.
A zeroed-out GRAT is structured so the taxable gift is essentially zero.
The main risk: if you die during the term, the assets return to your estate, so short terms reduce that risk.

Requirements

Assets expected to appreciate significantly
Willingness to survive trust term
Estate planning attorney required

How to Implement

1Consult estate attorney and CPA
2Transfer appreciating assets to GRAT
3Receive annuity payments for trust term
4Growth above IRS hurdle rate passes tax-free to heirs
5"Zero-out" GRAT minimizes gift tax

The bottom line
A GRAT transfers upside above an IRS hurdle rate to heirs with little or no gift tax, working best with assets poised to appreciate. Surviving the term is the key condition.

Frequently Asked Questions

Minimum Investment

$500,000+ typically

Educational Only: This information is for educational purposes. Consult a qualified financial advisor or tax professional before implementing.

Last reviewed: April 2026

Related estate planning strategies

Dynasty TrustTransfer wealth across multiple generations while avoiding estate taxes at each generation.Annual Gift Tax ExclusionGive $19,000/person/year tax-free - remove assets from estate without using exemption.Irrevocable Life Insurance Trust (ILIT)Remove life insurance from estate - heirs receive proceeds tax-free.

Sources

Internal Revenue Service, Rev. Proc. 2025-32
2026 inflation-adjusted amounts (tax brackets, standard deduction, estate & gift, FSA, credits)
Internal Revenue Service, Notice 2025-67
2026 retirement plan limits (401(k), IRA, SIMPLE, catch-up)
Internal Revenue Service, Rev. Proc. 2025-19
2026 HSA and HDHP inflation-adjusted limits

Educational information only. Not financial, tax, or legal advice or a recommendation. Figures are drawn from the primary sources cited above; verify current amounts with the source before acting.