GRATs: A Strategic Way to Shift Appreciation and Preserve Exemption
Many high-net-worth individuals are focused on one big estate planning question: How can I pass growing assets to my family without using up my gift or estate tax exemption?
A Grantor Retained Annuity Trust (GRAT) offers a powerful answer. Often described as a “heads I win, tails I tie” strategy, a GRAT allows you to freeze the value of an appreciating asset for estate tax purposes, while transferring any excess growth to your heirs with little or no gift tax.
How a GRAT works
A GRAT is an irrevocable trust funded by the grantor with assets expected to appreciate—like public equities, real estate or a business interest. In exchange, the grantor receives an annuity stream from the trust over a fixed number of years.
The IRS uses a formula based on a published interest rate (IRS Section 7520 rate) to value the annuity. If the rate of return on the trust assets exceeds the IRS Section 7520 rate, the excess appreciation passes to the beneficiaries free of gift tax.
Because the retained annuity is subtracted from the total gift value, many GRATs are structured to result in a “zeroed-out” gift. If the strategy works, it’s an elegant win: you’ve removed future asset growth from your estate with minimal or no use of an exemption. If the trust assets don’t perform better than the IRS Section 7520 rate, the donor simply gets some or all of the trust assets back -a tie.
GRATs in the current tax environment
Pending legislation would increase the federal estate and gift tax exemption to $15 million per person ($30 million per couple) beginning in 2026 and make those levels permanent.1
But GRATs aren’t fundamentally about using an exemption—they’re about preserving it. The primary benefit of a GRAT is its ability to transfer appreciation, not principal, at little or no tax cost. That makes it a valuable strategy regardless of the exemption level.
Why GRATs remain powerful
When properly designed, GRATs offer multiple advantages beyond tax savings:
- You shift future growth. Any appreciation above the IRS Section 7520 rate passes to your heirs tax-free, removing it from your estate.
- You keep current cash flow. The annuity provides predictable income back to you during the term and can be as short as two years.
- You preserve the exemption. Zeroed-out GRATs require little or no use of your lifetime gift exemption.
- You can roll them. A series of short-term “rolling GRATs” can help take advantage of market volatility and maximize transfer efficiency over time.
Risks and limitations
Like all strategies, GRATs come with tradeoffs and design considerations:
- You must survive the term. If the grantor dies before the GRAT ends, the trust assets are pulled back into the estate, eliminating the tax benefit.
- You won’t get a GST head start. GRATs are less efficient for generation-skipping transfer (GST) planning because the GST exemption must be applied to the GRAT’s payout to the beneficiary.
- You need performance. If asset growth doesn’t exceed the IRS hurdle rate, no value transfers to heirs. The strategy breaks even, but legal and administrative costs still apply.
When a GRAT makes sense
A GRAT might be a good strategy if:
- You have high-growth or volatile assets, such as pre-IPO stock or a concentrated equity position.
- You’ve used up most of your exemption and want another tool to transfer wealth.
- You’re interested in estate freezing and want to lock in today’s asset values for tax purposes.
- You’re comfortable with complexity and are working with experienced advisors.
- You like the idea of a “no lose” proposition where, even if the strategy doesn’t pan out, you still retain the assets.
Final thoughts
A Grantor Retained Annuity Trust can be a highly effective tool for shifting asset appreciation out of your estate with little or no tax cost, especially in periods of market volatility or when other exemptions have already been used.
If you’re holding appreciating assets and want to understand how a GRAT fits into your plan, connect with your Corient Wealth Advisor. Together, we’ll explore whether this heads-you-win strategy deserves a place in your long-term planning.
1 Big GOP Tax Bill Could Change Your Estate Planning for 2025 | Kiplinger
ABOUT THE AUTHOR
John Schuman
John is a Partner, Head of Wealth Transfer at Corient, based in our Columbus, OH, office. Previously, he was a Partner, Co-CEO and President of legacy firm Budros, Ruhlin & Roe. As a CERTIFIED FINANCIAL PLANNER™ certificant, licensed attorney and former Certified Public Accountant (CPA), he adds an exceptional perspective to the firm. John’s expertise includes estate planning and taxation, income tax, general business and succession planning, and charitable and retirement planning. He has been a featured speaker at conferences of the Columbus Bar Association, the Financial Planning Association (FPA), the National Association of Personal Financial Advisors (NAPFA), the Ohio CLE Institute, The Columbus Foundation and the International Association of Advisors in Philanthropy.
John holds a Bachelor of Science from The Ohio State University and a Juris Doctorate from Capital University Law School (summa cum laude). John is a member of the Financial Planning Association (FPA), the National Association of Personal Financial Advisors (NAPFA), and the Columbus, State of Ohio and American Bar Associations. He also serves as a member of the Professional Council of The Columbus Foundation.
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