Grantor Retained Annuity Trust (GRAT)

A GRAT is an irrevocable trust to which the grantor contributes appreciated or appreciating assets. The trust pays the grantor a fixed annuity stream for a chosen term (often two or three years), sized so that the present value of the annuity equals the gift value. At the end of the term, any remaining trust assets pass to the named remainder beneficiaries with no additional gift tax. The effective “hurdle rate” for transferred appreciation is the Section 7520 rate at the time of funding, 4.4% for April 2026.

Example: a tech executive funds a two-year GRAT with $5 million of pre-IPO shares with a 7520 rate of 4.4%. The trust pays her $2.67 million each of two years, totaling $5.34 million, satisfying the annuity. The shares IPO and rise to $9 million during the term. After paying the $5.34 million back, $3.66 million passes to her children gift-tax free.

Common mistake: funding a GRAT and dying during the term. Assets return to the estate, nullifying the benefit. Shorter terms reduce mortality risk.

GRATs matter at pre-IPO funding moments, at high-volatility stock positions, and before a known catalyst that will move the shares substantially.