A GRAT, or grantor retained annuity trust, is an irrevocable trust that lets you transfer appreciating assets to your beneficiaries while keeping the right to receive fixed annuity payments for a set number of years. If the assets grow faster than the IRS assumes when the trust is created, that extra growth passes to your beneficiaries with little or no additional gift tax. A GRAT is one of the few estate planning tools built specifically to move future appreciation out of your taxable estate.
How Does a GRAT Work?
You start by transferring an asset, often stock, a business interest, or real estate, into an irrevocable trust. In return, the trust pays you a fixed annuity for a set term, usually two to ten years. At the end of that term, whatever remains in the trust passes to your named beneficiaries.
Many grantors use a series of shorter GRATs, sometimes called rolling GRATs, instead of a single long-term trust. Each shorter GRAT carries less mortality risk, since you only need to survive its individual term rather than one long stretch of years, and it also captures a fresh IRS assumed rate at the start of each new term. This approach can smooth out the effect of market swings across multiple valuation windows rather than depending on the performance of one term alone.
The IRS calculates the value of your retained annuity using an interest rate published monthly under Section 7520. If the trust’s actual investment return beats that assumed rate, the difference transfers to your beneficiaries free of additional gift tax. If the assets underperform, you simply receive back what you put in through the annuity payments, and no additional tax benefit occurs. GRATs are authorized under 26 U.S.C. § 2702, which sets the valuation rules for trusts where a grantor retains an interest.
Why Use a GRAT in Estate Planning?
A GRAT works best for assets you expect to grow substantially during the trust term. Common uses include:
- Closely held business interests: Shares in a family business expected to appreciate before a sale or transition.
- Pre-IPO stock: Company stock likely to increase sharply in value.
- Real estate: Property in a growing market or slated for development.
- Investment portfolios: Concentrated stock positions with strong growth potential.
Because a GRAT can be structured with the annuity payments set close to the value of the assets contributed, some grantors structure a “zeroed-out” GRAT, where the taxable gift at the outset is minimal or close to zero. This makes a GRAT attractive for transferring wealth without using up your lifetime gift and estate tax exemption.
A GRAT Example
Suppose you transfer $2 million in stock into a five-year GRAT. The IRS’s assumed rate at the time is 5%, which sets your annuity payments. If the stock grows at an average of 12% per year over the trust term, the difference between the actual growth and the assumed 5% rate passes to your beneficiaries when the trust ends, largely free of additional gift tax. If the stock only grows at 4%, you receive back close to the full value through your annuity payments, and little wealth transfer occurs, but you also incur little downside beyond legal and administrative costs.
Risks and Limitations of a GRAT
A GRAT carries real risks alongside its benefits. Key risks include:
- Mortality risk: You must survive the full trust term, or a portion of the trust assets returns to your taxable estate.
- Performance risk: Assets that grow more slowly than the assumed rate produce little or no tax savings, even though the trust stays irrevocable for its full term.
- Liquidity constraints: Annuity payments must be made on schedule, so the asset needs to generate enough cash or allow in-kind payments.
- Loss of control: Once assets are transferred into the trust, you cannot reclaim them if your circumstances change.
A GRAT performs best when paired with assets you are confident will hold up over time, and when the mortality risk has already been factored into your broader estate plan.
Is a GRAT Right for a Louisiana Estate Plan?
Louisiana’s community property rules and forced heirship laws add a layer that grantors in other states do not face. Assets classified as community property, meaning property acquired during the marriage that belongs equally to both spouses, generally need both spouses’ involvement before they can fund a GRAT, and children who qualify as forced heirs under Louisiana law, meaning children under 24 or those who are permanently incapacitated, may have a claim against a portion of your estate, regardless of how a trust is structured.
An estate planning attorney can review how your specific assets are classified and whether a GRAT fits alongside your other Louisiana estate planning documents.
A GRAT is not a stand-alone plan. It functions best as one piece of a broader strategy that also addresses your will, any trusts already in place, and how Louisiana’s succession laws will treat assets that fall outside the GRAT.
Contact Our Louisiana Estate Planning Law Firm For Help Today
If you are planning for the future or need guidance with wills, trusts, or probate in Metairie, Louisiana, contact the experienced estate planning attorneys at WJ Blanchard Law to schedule a consultation and protect your family’s legacy today.
We proudly serve New Orleans, Jefferson Parish, and the surrounding areas:
WJ Blanchard Law
2800 Veterans Blvd Suite 257
Metairie, LA 70002
Phone: (504) 313-7478
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