This page walks through a grantor retained annuity trust, or GRAT, in eleven steps: from whether your estate will owe federal estate tax to what the trust could pass to your children. Each step works the arithmetic on your own numbers and marks every figure as set by law or as your assumption.
Advisors: go straight to the summary card.
Worked example at the October 2026 rate
A grantor retained annuity trust, or GRAT, lets you pass the future growth of an asset to your children without paying gift tax and without using your lifetime exclusion: the amount each person may give away, during life or at death, before federal gift or estate tax applies. Giving the asset outright would use your exclusion on its full value today. Keeping it means all of its growth adds to your taxable estate. A GRAT takes a third path. You place the asset in the trust, the trust pays its value back to you over a short term plus interest at a rate the IRS sets, and whatever the asset earns above that rate passes to your children.
If the asset does not beat the IRS rate, the trust returns everything to you, and the cost is the legal work of setting it up. Your exclusion is untouched either way. That one-sided bet is why GRATs are a standard tool for owners of fast-growing assets. The Internal Revenue Code provides for this structure (IRC §2702).
You fund the trust: $5,000,000
An annuity each year for 2 years
What remains at the end
The example uses a $5,000,000 position and a $20,000,000 estate. Replace any figure with your own; every step below recalculates as you type.
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Federal estate tax applies only to the part of an estate above the basic exclusion amount, $15,000,000 per person this year, adjusted for inflation in later years (IRC §2010(c)). Property left to a surviving spouse who is a U.S. citizen passes free of estate tax (IRC §2056), so for a married couple the tax usually falls due at the second death. The couple can use both spouses' exclusions if the executor of the first spouse to die elects portability. Above the exclusion, the tax rate is 40% (IRC §2001(c)). California has no estate tax. A GRAT saves estate tax only if your estate will exceed the exclusion, so this step comes first.
This year's federal estate tax exclusion has not been loaded yet, so the estate-tax figures are paused. The GRAT calculations in the other steps are unaffected.
Your estate: $20,000,000 growing 6% a year for 20 years comes to $64,142,709. Your exclusion: $15,000,000 per person, counted twice for a married couple using portability, indexed at 2.5% a year, comes to about $49,158,493. Amount above the exclusion: $14,984,216. Estate tax at 40%: $5,993,686.
Projected estate = net worth × (1 + growth)^years. Projected exclusion = exclusion × (1 + inflation)^years, doubled for a married couple using portability. Estate tax = 40% × (projected estate − projected exclusion), when that difference is positive.
On these assumptions, your estate exceeds the exclusion by $14,984,216, and federal estate tax on that amount would be about $5,993,686. A GRAT aims to move future growth out of your estate before it adds to that amount.
The projected exclusion is approximate. The law indexes it by a statutory inflation measure and rounds to a multiple of $10,000; this page compounds it at the inflation rate you choose.
For a married couple, this assumes the executor of the first spouse to die elects portability on a timely estate tax return. The exclusion carried over from that spouse is fixed at the first death and does not grow with inflation afterward, so this projection overstates the combined exclusion when the first death comes early (IRC §2010(c)(4)–(5)).
In that case a GRAT saves no federal estate tax. It also costs something: assets that pass through a GRAT keep your original tax basis, roughly what you paid, instead of the step-up to full value they would receive at your death, so your children could owe more capital-gains tax when they sell. You can continue through the steps to see how a GRAT works. If your concern is the capital-gains tax on a large, low-basis position, a charitable remainder trust addresses that problem.
Charitable remainder trusts and capital-gains tax, at CalCRUT.com
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A grantor retained annuity trust, or GRAT, is an irrevocable trust you fund with an asset, often stock you expect to rise. For a fixed number of years, called the term, the trust pays you an annuity: a set amount each year. When the term ends, whatever is left, called the remainder, passes to your children or to a trust for them. The IRS treats your gift to your children as the asset's value minus the value of the annuity you keep (IRC §2702). That gift is measured on the day you fund the trust, before anyone knows how the asset will perform, using the IRS's assumptions instead of the asset's actual results. That timing is what makes a GRAT work. During the term you pay income tax on the trust's income and gains as if you still owned the asset, because the trust is a "grantor trust" for income tax purposes; paying that tax is not an additional gift (Rev. Rul. 2004-64).
You place $5,000,000 in the trust. It pays you an annuity for 2 years, starting at $2,711,907. What remains after the last payment goes to your children.
Taxable gift = value of the asset placed in trust − present value of the annuity you keep (IRC §2702(a)(2)(B)).
Your GRAT takes in $5,000,000, pays it back to you as an annuity over 2 years, and passes anything left over to your children. The next two steps show how the IRS values what you keep, and why the gift can be zero.
The asset value, $5,000,000, is more than your net worth of $20,000,000. Check both figures; the calculation continues.
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To value the annuity you keep, the IRS assumes the trust will earn a fixed interest rate, the §7520 rate, named for the Code section that sets it. The rate is reset every month at 120% of the federal midterm rate, rounded to the nearest 0.2% (IRC §7520(a)); for October 2026 it is 5.6%. This page calls it the IRS rate. The value of your annuity is each payment discounted at the IRS rate, added together. Because the payments go to you or your estate for a fixed term, your age does not enter the calculation (Walton v. Commissioner, 115 T.C. 589 (2000)).
Annuity factor for 2 years at 5.6%: 1 ÷ 1.056 + 1 ÷ 1.056² = 0.946970 + 0.896752 = 1.843721. Each dollar of yearly annuity is worth 1.843721 today.
Level annuity factor = (1 − (1 + i)^−n) ÷ i. Rising annuity factor = Σ (1 + g)^(t−1) × (1 + i)^−t, for t = 1 to n. Here i is the IRS rate, n the term, and g the yearly increase (Reg. §25.2512-5(d); IRS Publication 1457, Tables B and K).
This uses the IRS rate for October 2026, 5.6%. A higher rate makes your annuity worth less today, so the annuity must be larger, and the trust has a higher return to beat.
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Set the annuity so the value of your payments, figured in step 3 at the IRS rate, equals the value of the asset. If the asset earned exactly the IRS rate, the trust would then pay everything back to you and nothing would be left for your children. The law therefore values your gift to them at zero: no gift tax is due and none of your exclusion is used. A GRAT designed this way is called "zeroed out." The name refers to the taxable gift, not to what your children receive.
The zero describes one scenario only: the asset earning exactly the IRS rate. What your children actually receive depends on how the asset performs, and it is known only when the term ends. Whatever the asset earns above the IRS rate passes to them, and none of it counts as a gift, because the gift was fixed at zero on the day you funded the trust.
Zero is also the safest setting. Exclusion used at funding stays spent even if the asset falls and nothing reaches your children. With a zero gift, a GRAT that fails costs only its setup.
The payments are large, because together they return the whole asset plus interest. The trust usually makes them in shares of the asset itself, so nothing has to be sold. The Tax Court approved this design in Walton v. Commissioner, 115 T.C. 589 (2000); the IRS has followed the decision since 2003, and the regulations reflect it (Reg. §25.2702-3(e), Examples 5 and 6, as amended in 2005). Funding the GRAT is still reported on a federal gift tax return.
Annuity: ($5,000,000 − $0) ÷ 1.843721 = $2,711,907 a year. Taxable gift: $5,000,000 − ($2,711,907 × 1.843721) = $0.
First-year annuity A₁ = (asset value − target gift) ÷ factor. Taxable gift = asset value − A₁ × factor.
Your trust pays you $2,711,907 in the first year, and the taxable gift is $0, fixed today. What reaches your children depends on how the asset actually performs; step 5 shows it at your assumed return.
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The annuity repays you the asset's value plus interest at the IRS rate. That rate is the hurdle: the return the asset must beat for anything to reach your children. Whatever the trust earns above the hurdle stays in the trust and passes to your children free of gift tax and, if you outlive the term, free of estate tax. If the trust earns the hurdle or less, the annuity takes everything and your children receive nothing. That is what happened in Walton itself: the stock in both trusts fell, the annuity payments, made partly in shares, used up everything, and nothing reached the grantor's daughters. You are then where you started, apart from the cost of setting up the trust.
Year by year at 10%: each year the trust grows, then pays your annuity. After 2 years, $354,996 is left for your children.
| Year | Start of year | Growth | Annuity paid to you | End of year |
|---|---|---|---|---|
| 1 | $5,000,000 | $500,000 | $2,711,907 | $2,788,093 |
| 2 | $2,788,093 | $278,809 | $2,711,907 | $354,996 |
* The trust paid all it held, less than the full annuity.
| Yearly return on the trust assets | Remainder to your children |
|---|---|
| -10% | $0 |
| -5% | $0 |
| 0% | $0 |
| 5% | $0 |
| 10% | $354,996 |
| 15% | $781,901 |
| 20% | $1,233,805 |
| 25% | $1,710,710 |
Hurdle: 5.6%
Year-end balance = previous balance × (1 + return) − annuity, never below zero. Remainder = balance after the last payment.
At 10%, the trust beats the 5.6% hurdle, and $354,996 passes to your children after 2 years. None of it counts as a gift, because the gift was fixed when you funded the trust. If you outlive the term, none of it is in your estate either.
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The annuity may rise by up to 20% a year (Reg. §25.2702-3(b)(1)(ii)(A)). A rising annuity starts smaller, so more of the asset stays in the trust in the early years and grows there. When the trust beats the hurdle, more reaches your children. The IRS value of what you keep is the same either way, because the payments are sized so their discounted value still equals the asset, so the taxable gift does not change.
Level payments start at $2,711,907. Payments rising 20% a year start at $2,471,489 and end at $2,965,787.
| Year | Level payment | Rising payment |
|---|---|---|
| 1 | $2,711,907 | $2,471,489 |
| 2 | $2,711,907 | $2,965,787 |
| Remainder to your children | $354,996 | $365,574 |
Payment in year t = A₁ × (1 + g)^(t−1), where g is at most 20% (Reg. §25.2702-3(b)(1)(ii)(A)).
At your assumed return, rising payments leave $365,574 for your children, $10,578 more than level payments. Rising payments help most when the asset grows steadily through the whole term.
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A GRAT's results are lopsided. When the asset beats the IRS rate, the excess goes to your children. When it falls short, the trust returns everything to you, and with a zero gift you lose nothing but the setup cost. Your children's share can rise without limit but never falls below zero; the chart in step 5 shows that shape. For the same average return, a more volatile asset is therefore expected to pass more to your children: its large gains are captured, and its losses cost you nothing.
Short terms make the most of this. A long GRAT nets its good years against its bad ones. A series of short GRATs keeps each good stretch and starts fresh after each bad one. When a short GRAT fails, it returns the fallen asset to you, and you can place it in a new GRAT at its lower value, so a later recovery goes to your children. Families often run such a series continuously, known as rolling GRATs.
Same asset, same four years, same total return of about 8%: the stock rises 30% a year for two years, then falls 20% a year for two years. One four-year GRAT passes $729,813. Two back-to-back two-year GRATs pass $2,212,615: the first captures the rise, and the second fails at no cost. Reverse the order, falling first and rising later, and the four-year GRAT passes $0, while the two short GRATs pass $1,416,073.
Each new GRAT uses the IRS rate of the month it is funded and carries its own setup and administration cost. The illustration assumes the rate stays at 5.6% and that the first GRAT's payments stay invested in the same stock and fund the second.
| One four-year GRAT | Two back-to-back two-year GRATs | |
|---|---|---|
| Rises 30% a year, then falls 20% a year | $729,813 | $2,212,615 |
| Falls 20% a year, then rises 30% a year | $0 | $1,416,073 |
Each GRAT: year-end balance = balance x (1 + that year's return) - annuity, never below zero. The second GRAT is funded with the first GRAT's payments.
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If you die before the last payment, the law treats the trust as still partly yours. It counts in your estate the amount that would be needed to keep paying your annuity indefinitely at the IRS rate in effect at your death, up to the whole value of the trust (IRC §2036; Reg. §20.2036-1(c)(2)). For rising payments, that includes the amount needed to fund each later increase. With a zeroed-out GRAT the result, in practice, is the whole trust. The trust keeps paying the annuity to your estate, so your family ends up about where it would have been without the GRAT, less its cost. Your age matters here: the odds of outliving the term come from the IRS mortality table.
Your chance of outliving a 2-year term at age 55: 98.7%. The table shows, for death at each point in the term, the trust's value, the amount needed to fund your annuity at 5.6%, and the amount included in your estate, which is the smaller of the two.
| Death | Trust value | Amount needed for your annuity | Included in your estate |
|---|---|---|---|
| Death right after funding | $5,000,000 | $48,426,904 | $5,000,000 |
| Death just after the year-1 payment | $2,788,093 | $48,426,904 | $2,788,093 |
Survival = l(x + n) ÷ l(x), from Table 2010CM. Included amount = the smaller of the trust's value and the property needed to pay the annuity at the IRS rate at death, plus, for rising payments, the present value of the property needed for each later increase (Reg. §20.2036-1(c)(2)(iii)).
With a zeroed-out GRAT, level or rising, the amount needed to fund your annuity exceeds the trust's value at every point in the term, so the entire trust returns to your estate if you die early. Your family loses nothing but the cost of the trust, and gains nothing. Short terms cut that risk too, one more reason for the short GRATs in step 7.
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Your basis in an asset is the starting point for measuring taxable gain, usually what you paid. Assets you own at death receive a new basis equal to their value then, the step-up, which erases the gain built up during your life (IRC §1014). Assets that pass through a GRAT keep your original basis instead (IRC §1015; Rev. Rul. 2023-2), so your children pay capital-gains tax on that gain when they sell. A common design solves this. The remainder stays in a trust for your children that lets you exchange your own assets of equal value, such as cash, for the trust's low-basis assets before your death (IRC §675(4)(C); Rev. Rul. 2008-22). Because that trust is a grantor trust, you and the trust count as one taxpayer for income tax, so the exchange is not a taxable sale (Rev. Rul. 85-13). The low-basis assets then come back into your estate and receive the step-up, and the trust holds assets with a full basis. The exchange needs trust terms drafted for it, a trustee who must confirm that the values match, and cash or other assets to make it. The figures below compare the two taxes at the horizon from step 1, because the estate tax would apply at death, and by then your children's share has kept growing.
This year's federal estate tax exclusion has not been loaded yet, so the estate-tax figures are paused. The GRAT calculations in the other steps are unaffected.
Your children's share grows to $1,013,279 in 20 years, at the estate growth rate from step 1. Its basis: $29,339. Built-in gain, the share's value minus its basis: $983,941. Estate tax avoided: $405,312. Tax on the built-in gain if sold, at 37.1%: $365,042.
Share at the horizon R_T = remainder × (1 + estate growth)^(T − n). Estate tax avoided = the estate tax rate × the smaller of R_T and the amount above the exclusion. Tax on built-in gain = gains rate × (R_T − basis of the share).
If the remainder keeps your basis $40,270
If nothing is done about basis, the GRAT saves $405,312 of estate tax, your children owe $365,042 of capital-gains tax if they sell, and the net benefit is $40,270.
If an exchange of assets before death restores the step-up $405,312
If you exchange assets of equal value with the trust before your death, the low-basis assets return to your estate and receive the step-up, and the benefit is the full $405,312 of estate tax avoided. That result depends on trust terms drafted for it and on your having assets to make the exchange.
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Every figure from the steps above, on one card. Change any input from here and every figure updates.
On your numbers, a GRAT funded with $5,000,000 for 2 years passes $354,996 to your children if the trust earns 10% a year and you outlive the term. Whether it suits you depends on the facts listed in the last step, which this page cannot see.
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The calculator handles the arithmetic. Whether a GRAT fits you turns on facts it cannot see.
The calculator shows how a GRAT behaves on assumed figures. A consultation runs it on your actual assets, values them, and tests whether a GRAT fits the rest of your plan.