Grantor Retained Annuity Trusts (GRATs)

Grantor retained annuity trusts, or GRATs, are financial tools that very wealthy people use in estate planning to pass their assets to their children while avoiding estate and gift taxes. This type of tax shelter is authorized by law, but some regulators consider it abusive.

Elaine Silvestrini, Writer
Fact Checked
Fact Checked partners with outside experts to ensure we are providing accurate financial content.

These reviewers are industry leaders and professional writers who regularly contribute to reputable publications such as the Wall Street Journal and The New York Times.

Our expert reviewers review our articles and recommend changes to ensure we are upholding our high standards for accuracy and professionalism.

Our expert reviewers hold advanced degrees and certifications and have years of experience with personal finances, retirement planning and investments.

Cite Us
How to Cite's Article

APA Silvestrini, E. (2022, June 11). Grantor Retained Annuity Trusts (GRATs). Retrieved July 6, 2022, from

MLA Silvestrini, Elaine. "Grantor Retained Annuity Trusts (GRATs).", 11 Jun 2022,

Chicago Silvestrini, Elaine. "Grantor Retained Annuity Trusts (GRATs)." Last modified June 11, 2022.

Why Trust
Why You Can Trust has provided reliable, accurate financial information to consumers since 2013. We adhere to ethical journalism practices, including presenting honest, unbiased information that follows Associated Press style guidelines and reporting facts from reliable, attributed sources. Our objective is to deliver the most comprehensive explanation of annuities and financial literacy topics using plain, straightforward language.

Our Partnerships, Vision and Goals

We pride ourselves on partnering with professionals like those from Senior Market Sales (SMS) — a market leader with over 30 years of experience in the insurance industry — who offer personalized retirement solutions for consumers across the country. Our relationships with partners including SMS and Insuractive, the company’s consumer-facing branch, allow us to facilitate the sale of annuities and other retirement-oriented financial products to consumers who are looking to purchase safe and reliable solutions to fill gaps in their retirement income. We are compensated when we produce legitimate inquiries, and that compensation helps make an even stronger resource for our audience. We may also, at times, sell lead data to partners in our network in order to best connect consumers to the information they request. Readers are in no way obligated to use our partners’ services to access the free resources on carefully selects partners who share a common goal of educating consumers and helping them select the most appropriate product for their unique financial and lifestyle goals. Our network of advisors will never recommend products that are not right for the consumer, nor will Additionally, operates independently of its partners and has complete editorial control over the information we publish.

Our vision is to provide users with the highest quality information possible about their financial options and empower them to make informed decisions based on their unique needs.

In order to understand the workings of a GRAT, you must first have an accurate definition of an irrevocable trust.

The Social Security Administration defines a trust, often called a trust fund, as “a legal arrangement regulated by State law in which one party holds property for the benefit of another.”

Put more simply, it’s a financial vehicle that grants a third party — called a trustee — the authority to control assets, including cash, liquid assets or property, for a beneficiary.

GRATs are irrevocable trusts. The grantor places assets, such as stocks or a business, into a trust that is set for a specified number of years. The trustee is usually a relative, such as a child of the grantor.

The grantor receives regular payments from the trust over the duration of the trust agreement, which is typically two to 10 years. The annuity is a percentage of the value of the principal of the trust, plus an interest rate set by the Internal Revenue Service, known as the 7520 rate. As of January 2019, the rate was 3.47 percent. The annuity in a GRAT is not the same as a traditional annuity issued by an insurance company.

The assets in the trust, including all appreciation, go to the beneficiaries at the end of the GRAT term.

Grantor retained annuity trusts are complex and best guided by an experienced estate planning attorney. But the result is often an inheritance tax exemption for the very wealthy. And although GRATs are specifically authorized by the tax code, the IRS includes a description of them on its webpage for Abusive Trust Tax Evasion Schemes – Special Types of Trusts, which explains how promoters use GRATs and other legitimate trusts to “hide the true ownership of assets and income or to disguise the substance of transactions.”

The IRS offers their abusive scheme toolkits to external stakeholders as a way to educate the public about tax avoidance schemes and protect taxpayers from promoters.

The existence of these abusive trust schemes make it all the more necessary for business owners to consistently improve their financial literacy and work with trusted advisors who take their fiduciary responsibilities seriously.

As the IRS states: “Taxpayers should be aware that abusive trust arrangements will not produce the tax benefits advertised by their promoters and that the IRS is actively examining these types of trust arrangements.”

According to the Washington Post, GRATs are a tax loophole accidentally created by Congress and unsuccessfully challenged by the IRS. The Post reported in 2013 that Congress created the GRAT while trying to stop another tax-avoidance scheme: the grantor retained income trust, or GRIT. GRIT was developed by the same lawyer who would then pioneer GRATs.

Taxpayers should be aware that abusive trust arrangements will not produce the tax benefits advertised by their promoters and that the IRS is actively examining these types of trust arrangements.
Internal Revenue Service, Small Business and Self Employed Division

Avoiding Gift Taxes

An “annual exclusion gift” refers to a gift that qualifies for the annual exclusion from federal gift taxes. The IRS determines this amount on an annual basis and releases updates in early November for the following year. For example, for 2018 and 2019, you can give up to $15,000 in cash or property value per person without incurring gift tax.

When a grantor creates a GRAT, the grantor is technically responsible for paying gift taxes on the value of the trust to the trustee. If the GRAT is set up correctly, however, that value should be calculated as zero or close to zero, and consequently, little or no gift taxes are due. That’s because the value of the trust, including the interest rate determined by the IRS, is supposed to be returned to the grantor over the number of years it exists.

Ideally, the assets in the trust will grow faster than the interest rate because any appreciation of the trust amount beyond the annuity payments is passed to the beneficiaries tax-free. If the assets in the trust grow at a lower rate, then the trustees don’t get any benefit from the trust. For this reason, GRATs work best when interest rates are lower.

Another potential downside is if the grantor dies before the end of the GRAT, the remaining assets become part of the taxable estate. For this reason, some people set up multiple, or laddered, GRATs. Each lasts two years, minimizing the chance that the grantor will die before the trust has ended. Each successive trust is funded with the annuity payments from the previous trust.

GRATs & Estate Taxes

The New York Times called GRATs “one of the tax code’s great gifts to the ultrawealthy” because they enable these families to pass wealth through generations without paying estate taxes. The estate tax applies to property worth more than $11.2 million for single people and up to double that for married couples.

The Times published an investigation in October 2018 showing how President Donald Trump’s parents used GRATs to pass their estate to Trump and his siblings while avoiding estate taxes.

According to the investigation, Trump’s parents put half their properties into a GRAT in the mother’s name and the other half in a GRAT in the father’s name. They then gave their children two-thirds of their assets in their GRATs. The children purchased the remaining third by making annuity payments to their parents for two years.

This allowed Trump and his siblings to take ownership of a majority of their parents’ estate without having to pay any estate taxes.

Looking for guaranteed income in retirement?
Annuities can provide you with income for life, ensuring you won't run out of money in retirement. Find out if an annuity is right for you.

Transferring Ownership of a Company

According to Craig Smalley, author and certified estate planner, a GRAT allows an S corporation owner to keep control of the business and “freeze the assets’ value and to remove it from the owner’s taxable estate.” But, Smalley notes, if the owner dies during the term of the GRAT, the current value of the stock is transferred back to the owner’s estate and will be subject to taxes.

A GRAT may be appropriate for a business owner whose company is rapidly growing in value or is expected to do so. A GRAT may also make sense for a business owner who’s expected to live longer than the GRAT term, or for a business owner who wants to maintain an income stream from the business but is fine with separating from its appreciation.

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: June 11, 2022

16 Cited Research Articles writers adhere to strict sourcing guidelines and use only credible sources of information, including authoritative financial publications, academic organizations, peer-reviewed journals, highly regarded nonprofit organizations, government reports, court records and interviews with qualified experts. You can read more about our commitment to accuracy, fairness and transparency in our editorial guidelines.

  1. Aucutt, R.D. (2019, March). Grantor Retained Annuity Trusts (GRATs) and Sales to Grantor Trusts. Retrieved from
  2. Barstow, D. et al. (2018, October 2). Trump Engaged in Suspect Tax Schemes as He Reaped Riches From His Father. Retrieved from
  3. Bawden-Davis, J. (2019, February 11). How the Rich Use GRATs to Get Richer. Retrieved from
  4. Caverly, N.B. and Simon, J.S. (n.d.). What Are Grantor-Retained Trusts All About? Retrieved from
  5. Ebeling, A. (2015, December 9). Tax-Free Transfer: GRATs Are Great. Retrieved from
  6. Hanlon, S. (2018, October 5). 3 Takeaways from the New York Times’ Bombshell Trump Investigation. Retrieved from
  7. Iarcurci, G. (2018, October 3). The Trump family used this strategy to save on taxes. Retrieved from
  8. Internal Revenue Service. (n.d.). Abusive Trust Tax Evasion Schemes – Special Types of Trusts. Retrieved from
  9. Internal Revenue Service. (n.d.). Frequently Asked Questions on Gift Taxes. Retrieved from
  10. Internal Revenue Service. (n.d.). Section 7520 Interest Rates. Retrieved from
  11. Jacobs, P. (2017, December 12). GRAT Planning Strategies. Retrieved from
  12. Mider, Z.R. (2013, December 28). GRAT shelters: An accidental tax break for America’s wealthiest. Retrieved from
  13. National Law Review. (2018, October 23). Estate Planning for Founders. Retrieved from
  14. Smalley, C.W. (2017, August 30). Estate Planning Part I - Passing Along Your Business to Your Children. Retrieved from
  15. Smalley, C.W. (2016, November 18). The Beauty of Grantor Retained Annuity Trusts. Retrieved from
  16. Smalley, C.W. (2018, June 4). Grantor Retained Annuity Trusts (GRAT) Are in the News Again. Retrieved from