Definition
A GRAT is an estate planning trust that lets a person transfer future appreciation of assets to heirs with little or no gift tax.
How It Works
The grantor places assets in the trust and receives fixed annuity payments back over a term. If the assets grow faster than an IRS-set rate, the excess passes to heirs free of gift tax. If the grantor survives the term, the strategy succeeds.
Example
A grantor funds a GRAT with stock expected to appreciate sharply, receives annuity payments back, and passes the growth above the IRS rate to heirs with minimal gift tax.
When It Works Best
It works best with assets expected to appreciate rapidly, in low interest rate environments, and when the grantor is likely to outlive the term.
Who It Applies To
High-net-worth individuals transferring appreciating assets.
Watch-Outs
If the grantor dies during the term, much of the benefit is lost. The technique is complex and has periodically faced proposed legislative limits.
