Authored by Matt Waters
If you’ve ever tried to freeze water in midair, you know it’s nearly impossible without perfect conditions. But when it comes to wealth, estate planners have figured out how to do exactly that. One of the most elegant ways to “freeze” the value of your estate and push growth to your heirs tax-efficiently is through a Grantor Retained Annuity Trust (GRAT).
GRATs are not new, but they’re experiencing a renaissance as families face historically high exemption levels and looming uncertainty around estate tax laws. For high-net-worth families looking to lock in tax efficiency, GRATs are a tool worth understanding.
What Is a GRAT?
A GRAT is an irrevocable trust into which a grantor (you) transfers appreciating assets. In exchange, the trust pays you back a fixed annuity stream for a set term.
- At the end of the term, any growth in excess of a small “hurdle rate” (set by the IRS, called the §7520 rate) passes to your heirs gift- and estate-tax free.
- If the assets don’t outperform the hurdle rate, the strategy simply “fails gracefully” — you’ve received your assets back through the annuity, and you’re no worse off.
In short: GRATs shift upside to heirs while minimizing downside risk.
Why GRATs Work
The IRS assumes that assets in a GRAT will grow at the §7520 rate (currently hovering around 5%). If your chosen assets grow faster than that, the excess growth passes outside your estate with no additional gift tax.
Example:
- You contribute $10M of stock to a GRAT.
- The IRS assumes it will grow at 5%.
- Over 10 years, the stock actually grows at 10%.
- That extra 5% of annual growth is “frozen out” of your estate and delivered to heirs tax-free.
The Benefits of GRATs
- Low-Risk Strategy – If assets underperform, you simply get them back.
- Tax-Efficient Transfer – All growth above the hurdle rate escapes estate taxation.
- Repeatable – You can run “rolling GRATs” year after year to maximize efficiency.
Flexibility – You can use a wide variety of assets: concentrated stock positions, private business interests, or marketable securities.
Who Uses GRATs?
- Entrepreneurs pre-liquidity event who expect significant appreciation in their company stock.
- Families with concentrated stock positions looking to transfer upside efficiently.
UHNW clients with taxable estates seeking “soft landings” in estate planning.
Risks and Considerations
- Mortality Risk – If the grantor dies during the GRAT term, the strategy unwinds and assets come back into the estate.
- Interest Rate Sensitivity – Higher §7520 rates mean a higher hurdle to clear.
Irrevocable – Once funded, you can’t just pull assets back at will.
When GRATs Work Best
- Families with high-growth assets they’re confident will outperform the hurdle rate.
- Entrepreneurs who want to transfer future appreciation of their company at minimal tax cost.
- Clients comfortable with irrevocable planning and long time horizons.
Final Thoughts
GRATs are a classic example of how sophisticated estate planning can work with, not against, IRS rules. By transferring assets into a GRAT, you’re essentially betting that your portfolio (or business) will outperform the government’s assumption.
Have questions about GRATs? Reach our to our team of professionals at Prime Capital Financial Denver to see how we can help.
This information does not constitute legal advice. Prime Capital Financial and its associates do not provide legal advice. Individuals should consult with an attorney regarding the applicability of this information for their situations.
Advisory products and services offered by Investment Adviser Representatives through Prime Capital Investment Advisors, LLC (“PCIA”), a federally registered investment adviser. Tax planning and preparation services are offered through Prime Capital Tax Advisory. PCIA: 6201 College Blvd., Suite 150, Overland Park, KS 66211. PCIA doing business as Prime Capital Financial | Wealth | Retirement | Wellness | Family Office | Tax Advisory.
