Grantor Retained Annuity Trusts

A grantor retained annuity trust (GRAT) is a bet against the IRS discount rate. You contribute an asset and retain an annuity that returns the full contribution plus interest at the Section 7520 rate over the term. Because the retained annuity nearly equals the contribution, the taxable gift is close to zero. Any appreciation above the 7520 hurdle stays in the trust and passes to beneficiaries free of gift and estate tax.

Why it is the pre-exit workhorse

Contribute pre-IPO or pre-sale stock to a two-year GRAT and, if the exit reprices the asset well above the hurdle rate, the excess transfers tax-free. If the asset underperforms, the annuity simply returns everything to you and the GRAT expires quietly. The downside is limited to transaction costs, which is why rolling short-term GRATs are standard practice for founders and large public-stock holders.

Design points that decide outcomes

• The 7520 rate is the hurdle. Set monthly by the IRS. Lower rates make GRATs easier to win; at higher rates the asset has to work harder.
• Mortality risk. If the grantor dies during the term, the assets return to the estate. Shorter terms reduce this risk.
• Grantor trust status. The grantor pays the trust's income tax, which is itself an additional tax-free transfer to beneficiaries.
• Valuation discipline. Hard-to-value assets require defensible appraisals; formula clauses protect against revaluation on audit.

Our role

We identify which of your assets are GRAT candidates, design term and annuity structures around your exit timeline, and coordinate execution with counsel, including rolling structures and immunization (swapping in bonds after a win to lock the transfer).