What Is a GRAT (Grantor Retained Annuity Trust)?

A grantor retained annuity trust (GRAT) is an irrevocable trust that pays you, the grantor, a fixed annuity for a set number of years. Whatever is left at the end passes to your beneficiaries, typically children or a trust for them. The gift is valued up front as the assets you put in, minus the IRS value of the annuity you keep. If the trust's assets grow faster than the IRS §7520 interest rate (5.6% for October 2026 and 6.2% for November 2026), that excess growth passes to your heirs with little or no gift tax.

How a GRAT works

• You fund the trust with assets you expect to appreciate, often closely held or pre-IPO shares, or a concentrated stock position.
• You keep a "qualified annuity interest." Under IRC §2702, a retained interest counts only if it is a right to fixed amounts paid at least annually. A qualifying interest is valued under §7520; anything else is valued at zero, which would make the entire transfer a taxable gift.
• The annuity is fixed. Treasury Regulation §25.2702-3 allows the payment to rise by no more than 120% of the prior year's amount. Each payment must be made within 105 days after the anniversary date if it is keyed to that date. The trust must prohibit additional contributions and prepayment (commutation). For trusts created on or after September 20, 1999, it must also bar paying the annuity with a note or similar debt.
• At the end of the term, the remaining assets pass to the remainder beneficiaries.

The §7520 "hurdle rate"

The IRS values your annuity using the §7520 rate for the month of the transfer. That rate is 120% of the federal midterm rate, rounded to the nearest 0.2%. The two-month look-back election in §7520 applies only when a charitable deduction is involved, so a typical family GRAT uses the rate for the month it is funded.

A higher rate means a higher annuity value, but also a higher bar the assets must clear before anything passes to heirs.

Illustration (simplified arithmetic, not a valuation):

• The setup. Put $10,000,000 into a 2-year GRAT in November 2026 at 6.2%, with level year-end payments sized so the gift is essentially zero.
• The annuity. That calls for about $5.47 million a year.
• If the assets grow exactly 6.2% a year, nothing is left for the heirs.
• If they grow 10% a year, roughly $614,000 passes.
• If they grow 15% a year, roughly $1.47 million passes.

Actual valuations use IRS tables and the trust's own terms.

Zeroed-out GRATs and *Walton v. Commissioner*

In *Walton v. Commissioner*, 115 T.C. 589 (2000), the grantor created two 2-year GRATs. If she died during the term, the remaining payments would go to her estate. The Tax Court held that her retained interest should be valued as an annuity for the full term of years, not cut short by her possible death. It struck down the contrary regulation example as invalid. The IRS acquiesced in Notice 2003-72 and amended the regulations (T.D. 9181, effective July 26, 2004).

Because the annuity can be valued for the full term, planners can set it so its value roughly equals the amount contributed. This is a "zeroed-out" GRAT: the taxable gift is at or near zero, and the GRAT uses little or none of your $15,000,000 2026 exemption.

Rolling (short-term) GRATs

Many GRATs are short. The Congressional Research Service notes terms "as short as two years", which limits the chance the grantor dies during the term. Some families "roll" each annuity payment into a new GRAT. Longer terms lock in the rate at funding, which can help if rates later rise. Shorter terms reduce mortality risk and let a poorly performing GRAT simply fail without wasting exemption.

Key risks

• Death during the term (mortality risk). If you die before the term ends, IRC §2036 brings trust assets back into your estate. Treas. Reg. §20.2036-1(c)(2) includes the amount of corpus needed to produce the annuity at the §7520 rate, capped at the trust's value. *Arithmetic only:* a $600,000 annual annuity at a 6.2% rate implies about $9.68 million includible, or the whole trust if it is worth less.
• Underperformance. If the assets don't beat the §7520 rate, nothing passes. With a zeroed-out design, you have used little exemption, so the main cost is legal and administrative.
• Valuation. Hard-to-value assets need a qualified appraisal. The annuity can be stated as a percentage of initial value as finally determined for tax purposes, which helps if the IRS later revalues the assets.
• Generation-skipping planning. GST exemption generally can't be allocated until the annuity term ends, under the "estate tax inclusion period" rule of IRC §2642(f). That makes GRATs a poor fit for long-term generation-skipping (dynasty) trusts.
• Income tax. GRATs are commonly drafted as grantor trusts, so you pay tax on trust income (IRC §677 covers trust income payable to the grantor). See What is a grantor trust?

GRAT vs. SLAT vs. outright gift

See What is a SLAT? and What is gift tax?

Proposed changes (not law)

On April 14, 2026, Senators Wyden and King introduced S. 4287, the "Getting Rid of Abusive Trust Schemes Act" (GRATS Act), which was referred to the Senate Finance Committee. As introduced, it would require for new GRATs:

• a term of at least 15 years and at most the annuitant's life expectancy plus 10 years;
• no decrease in annual payments;
• a remainder worth at least the greater of 25% of the contributed assets or $500,000.

It would also tax transfers between a grantor trust and its owner as sales, and treat the owner's payment of the trust's income tax as a gift. It is a proposal. Current law is as described above.

Questions to ask an estate planning attorney

1. Which assets have the strongest case for beating the §7520 rate?
2. Should we use one longer GRAT or a series of rolling 2-year GRATs?
3. How will hard-to-value assets be appraised, and how is the annuity stated?
4. What happens to the remainder: outright to children, or into a continuing trust?
5. How does a GRAT fit with a SLAT or other exemption-using gifts in 2026?

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Related pages

• What is a SLAT?
• What is a grantor trust?
• What is an irrevocable trust?
• What is gift tax?
• Can a trust reduce estate taxes?
• What is portability of the estate tax exemption?
• Questions to ask an estate planning attorney

This page is general information, not legal or tax advice. Laws change and vary by state; consult a licensed attorney and tax advisor about your situation.