Estate Planning Guide · Updated November 2026
Grantor Retained Annuity Trust (GRAT): How It Works, the Mortality Risk, and How It Compares to a SLAT
A grantor retained annuity trust (GRAT) is an irrevocable trust that pays you a fixed annuity for a set number of years. When the term ends, whatever is left passes to your beneficiaries. The taxable gift is measured up front using an IRS interest rate, so any growth above that rate may transfer with little or no gift tax.
A GRAT can help families, business owners, and multi-generational households move future appreciation out of a taxable estate. It also has firm rules and real risks. This guide covers both.
Schedule a ConsultationThe Mechanics
How a Grantor Retained Annuity Trust Works
Think of a GRAT as a fixed course with one star to steer by. You (the grantor) move assets into the trust and keep the right to an annuity, paid at least once a year for a fixed term. Rules for that retained interest come from IRC §2702 and Treasury Regulation §25.2702-3. Among other things, the regulation requires a fixed amount or a fixed percentage of the trust's starting value. It generally limits yearly increases to 120% of the prior year's amount and bars additional contributions and early payouts to anyone else.
The benchmark is the IRS §7520 rate. The IRS uses it to value your retained annuity. The gift is the value you contributed minus the present value of the annuity you kept. According to the IRS Section 7520 rate table (see also Rev. Rul. 2026-21), the rate for November 2026 is 6.2%. The December rate had not been published as of November 10, 2026. The rate changes every month, and the one in effect when the trust is funded is the one that applies.
The trade-off: remainder beneficiaries receive only what the trust earns above the §7520 rate. When the rate is higher, the assets have to beat a higher hurdle before anything passes on. If they fall short, the trust may simply return everything to you.
The "Zeroed-Out" GRAT, Conceptually
In a zeroed-out GRAT, the annuity is set so its present value, at the §7520 rate, roughly equals what you put in. That makes the taxable gift close to zero. Here is how it works, step by step (illustrative only, not a projection):
You fund the GRAT with assets, often ones you expect could grow, such as closely held business shares.
The trust pays you the annuity each year of the term. Assets can be returned to you if cash is short.
If total returns beat the §7520 rate, the excess may pass to beneficiaries at the end of the term. If they don't, little or nothing passes on, and the main cost is usually setup and administration.
No outcome is assured. Results depend on how the assets perform, how they are valued, and the terms your attorney drafts.
2026 Reference Points
The Numbers That Frame GRAT Planning in 2026
6.2%
§7520 rate for November 2026, per the IRS
$15M
2026 basic exclusion amount under Public Law 119-21, per the IRS
$19,000
2026 annual gift exclusion per recipient, per the IRS
Many GRAT articles still talk about a looming exemption "sunset." Today, the main reason to use a GRAT is different: to move future appreciation out of the estate without spending much of your exemption. That can matter for estates near or above the exclusion amount, or for assets that could grow quickly. See our 2026 estate tax exemption guide and annual gift tax exclusion guide.
Mortality Risk
What Happens If the Grantor Dies During the GRAT Term?
If you die before the GRAT term ends, some or all of the trust assets may be pulled back into your taxable estate. In many cases, that undoes most of the estate tax benefit. Because you still hold a retained annuity interest, estate tax rules generally count the portion of the trust needed to fund that annuity. Depending on the trust's value and the rate, that can be most or all of the assets.
This is the core limitation of a GRAT. The planning works only if you outlive the term. Some ways families and their attorneys try to manage this risk:
- 1Shorter terms, often two years, so there is less time for the risk to occur. The trade-off is less time for growth to build up.
- 2Rolling GRATs, where each annuity payment funds a new short GRAT. This adds administration and cost.
- 3Life insurance coordination, sometimes held in an irrevocable life insurance trust (ILIT), to help offset the estate tax if the grantor dies early. Coverage depends on underwriting and adds premium cost.
Thinking about a GRAT before year-end?
We can review the term length, the assets involved, and the mortality risk with you before you meet with your estate attorney.
Side-by-Side
GRAT vs. SLAT vs. ILIT
Each trust is a different star in the same constellation. They solve different problems and are often used together. The comparison below is general, and how any trust works depends on how it is drafted.
| Feature | GRAT | SLAT | ILIT |
|---|---|---|---|
| Who benefits | Grantor during the term; remainder beneficiaries (often children or a trust for them) afterward | Spouse (and often descendants) during the spouse's lifetime | Beneficiaries who receive the life insurance proceeds |
| What happens to the gift | Gift is the remainder value, which may be set near zero; only growth above the §7520 rate passes on | Completed gift that generally uses lifetime exemption; assets and future growth leave the estate | Premium gifts may use the annual exclusion or exemption; the death benefit is generally kept outside the estate |
| Main risk | Grantor dies during the term, or assets underperform the §7520 rate | Divorce or the spouse's death may cut off indirect access | The 3-year rule on transferred policies; lapse if premiums aren't funded |
| Learn more | This guide | SLAT guide | ILIT guide |
Balanced View
GRAT Benefits and the Limitation Behind Each One
Little Use of Exemption
A zeroed-out GRAT is designed to use little or none of your lifetime exemption. Limitation: if the assets don't beat the §7520 rate, nothing meaningful may pass to beneficiaries.
Freezes Value of Assets That May Grow
This can suit business owners whose shares may rise in value before a sale or succession. Limitation: hard-to-value assets need qualified appraisals, and the IRS can challenge the values.
Grantor Trust Tax Treatment
You usually pay the trust's income tax, which can let more value stay in the trust. Limitation: those tax bills come from your own cash flow every year.
You Keep an Income Stream
The annuity comes back to you during the term. Limitation: once the term ends, you have no access to the remainder.
Fits Multi-Generational Plans
The remainder can pour into trusts for descendants as part of a multi-generational wealth plan. Limitation: GRATs are generally poorly suited for allocating generation-skipping transfer tax exemption, so ask your attorney how to structure this.
Rules Are Well Established
The structure rests on §2702 and its regulations. Limitation: beneficiaries generally take over your cost basis, so they may not get a step-up at your death and could owe capital gains tax later.
How We Help
Your Attorney Drafts the Trust; We Coordinate the Plan
The Stellarix Group does not draft trusts or give legal or tax advice. Your estate attorney drafts the GRAT, and your CPA handles the tax reporting. Our CFP® team, including Financial Planning Manager Ryan Griffin, CFP®, and Financial Advisor Haley Gray, CFP®, AIF®, works on the financial planning side. That includes:
- Modeling whether your cash flow can cover the income tax on a grantor trust
- Reviewing which assets you are considering and how concentrated they are
- Coordinating with your appraiser on business valuations
- Reviewing life insurance with Melissa Lang, CLU, ChSNC, CLTC, if mortality risk is a concern
Financial planning, advisory, and insurance services are offered through MML Investors Services, LLC. We'll explain how we're paid and any conflicts of interest before you decide anything. We work with families in Denver and in all 50 states.
Request a GRAT Planning Review
A conversation with a CFP® professional to help you prepare for your estate attorney meeting.
FAQ
Grantor Retained Annuity Trust Questions
What Is a Grantor Retained Annuity Trust in Simple Terms?
It's an irrevocable trust that pays you a fixed annuity for a set term. Whatever is left at the end goes to your beneficiaries. Growth above the IRS §7520 rate may pass with little or no gift tax, but only if you outlive the term.
What Happens If the Grantor Dies During the GRAT Term?
Some or all of the trust assets may be pulled back into the grantor's taxable estate, which can undo much of the planning. Shorter or rolling terms and life insurance coordination are common ways to manage this risk. Each adds cost and its own trade-offs.
Who Pays Taxes on a GRAT's Income?
Usually the grantor. A GRAT is typically set up as a grantor trust, so its income is reported on your personal return. Filing requirements depend on how the trust is drafted, so confirm them with your CPA.
What Is the Downside of an Irrevocable Trust Like a GRAT?
You give up control and access to the remainder, the terms are generally hard to change, and beneficiaries may not get a basis step-up. With a GRAT in particular, there is also the risk that the grantor dies during the term or that the assets fall short of the §7520 rate.
Is a GRAT or a SLAT Better?
Neither is better in every case. A GRAT is designed to transfer growth while using little exemption. A SLAT uses exemption but can leave indirect access through a spouse. Many families weigh both with their attorney.
Keep reading
Ryan Griffin, CFP® · Financial Planning Manager, The Stellarix Group
One Star to Guide Your Legacy Plan
A GRAT is one option among many. Our team can help you see how it fits with your investments, insurance, and estate plan, so the conversation with your attorney starts with a clear picture.
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