What Is a Grantor Retained Annuity Trust (GRAT)? Examples

A GRAT has three roles. The grantor is you, the person who creates and funds the trust. The trust pays you an annuity, a fixed amount each year, for a set number of years. The people who receive what is left at the end are the remainder beneficiaries.

The tax idea comes from Section 2702. When you put assets in trust for family and keep an interest, the law counts your gift as the value of the assets minus the value of what you kept. A kept interest counts only if it is a qualified one, such as the right to fixed amounts paid at least once a year. Otherwise it is valued at zero.

The IRS values your annuity with its Section 7520 rate, an interest rate it publishes each month. The rate for October 2026 is 5.6%. If the annuity is large enough to equal the value you put in, the taxable gift is close to zero. Any growth above 5.6% a year then stays in the trust and goes to your beneficiaries when the term ends.

A holder of private-company shares may expect them to rise if the company lists or is acquired. A GRAT lets that holder move shares into the trust at today’s value. The steps below show the order of events.

1. 01
   Set the valuePrivate shares have no market price, so the value on the funding date is a judgment. The gift tax return asks for a qualified appraisal or a detailed description of how the value was set.
2. 02
   Fund the trustYou transfer the shares and sign the trust. No more assets can be added later. Check the company’s transfer rules first, because many private companies limit who can hold their shares.
3. 03
   Receive the annuityEach year the trust pays you the fixed amount. A promise to pay later with a note does not count as payment.
4. 04
   End the termWhat is left passes to your beneficiaries. They generally take your tax basis in the shares, so a later sale taxes the whole gain since you first bought them.

The gift goes on Form 709, the federal gift tax return. The right to what remains after the term is a gift of a future interest. The IRS instructions say the annual exclusion does not cover such gifts, and you must report them whatever their value. A GRAT is usually written as a grantor trust, so you report its income on your own return under Section 671. See cost basis for how basis carries to the people who receive the shares.

An investor puts $1,000,000 of private shares into a two-year GRAT in October 2026. At the 5.6% rate, an annuity of about $542,381 a year equals the starting value, so the taxable gift is close to zero. The trust pays this amount at the end of each year. The table shows what is left for the beneficiaries under three growth paths.

At 30% growth, the trust returns the full $1,000,000 in payments and still holds $442,523 for the beneficiaries. At 10%, little is left. At 0%, the payments use up everything and the beneficiaries receive nothing. In that last case the investor has lost only the cost of setting up the trust, because the shares came back as payments. The gain for the family exists only when growth beats the rate.

• Not outliving the termIf the grantor dies during the term, Section 2036 can bring the property back into the taxable estate. That is why the length of the term matters.
• Counting on growthA GRAT passes on only the growth above the 5.6% rate. Private shares can stay flat or fall.
• Adding assets laterThe rules bar additional contributions. A second contribution needs a new trust.
• Under-documenting the valuePrivate shares are hard to value. A weak appraisal can start a dispute with the IRS about the size of the gift.
• Skipping the company’s rulesTransfer limits, consent rights and lock-ups can block a transfer to a trust. Read the shareholder agreements first.

GRAT

A trust that pays its creator a fixed annuity for a set term and then passes the rest to beneficiaries.

Grantor

The person who creates and funds the trust.

Annuity

A fixed amount paid at least once a year for the term.

Remainder

What is left in the trust when the term ends. It goes to the beneficiaries.

Section 7520 rate

A monthly IRS interest rate used to value annuities and remainders. It was 5.6% for October 2026.

Gift tax

A federal tax on large gifts, measured against a lifetime amount that is $15,000,000 per person for 2026.

Grantor trust

A trust whose income is reported on the grantor’s own tax return.

Figures were last checked on October 13, 2026. Rules are US federal. Rates and limits apply to 2026 unless noted. The worked example is illustrative arithmetic. State taxes are not covered.