What Is a Grantor Retained Annuity Trust (GRAT)?
A GRAT allows you to pass asset growth to family members with little or no gift tax, making it ideal for taxpayers who want to reduce their taxable estate.
A Grantor Retained Annuity Trust (GRAT) is an irrevocable trust used to transfer asset appreciation to family members at minimal gift tax cost. The person creating the trust contributes assets but retains the right to receive fixed annual payments for a set number of years. At the end of that period, any remaining value—typically the appreciation beyond a certain IRS rate—passes to the beneficiaries, usually children, free of gift tax.
GRATs are especially beneficial when assets are expected to grow significantly over time. If the trust's investments outperform the IRS's assumed rate, the excess passes on tax-free. However, if the grantor dies during the trust term, the assets revert to the estate, and the tax advantage is lost.
Though GRATs are governed by federal tax law, they work well in New York estate planning. New York has no gift tax, but its estate tax can be steep, so removing appreciation from the estate is a key strategy. To maximize effectiveness, the trust must be carefully drafted to meet IRS rules and should be managed by a New York trustee if kept in-state.
Used properly, GRATs offer a low-risk, high-reward opportunity to shift wealth to heirs without triggering immediate tax consequences—especially valuable for individuals with large estates or appreciating assets like stocks, businesses, or real estate.
GRATs are governed by federal tax law (IRC §2702), not specifically by New York law.
New York estate tax does not have a gift tax, but estate taxes still apply, so GRATs can reduce the value of the taxable estate.
GRATs can work with NY irrevocable trust rules, as long as the trustee and situs are compliant.
How a GRAT Works – Step by Step
You transfer assets (e.g., stock, real estate, business interests) into the GRAT.
The trust calculates a “Section 7520 rate” (a published IRS rate) to determine the value of the annuity.
You receive annual annuity payments for, say, 5 years.
If the trust assets grow faster than the 7520 rate (e.g., the market performs well), the excess passes to your beneficiaries at the end of the term, with little or no gift tax.
If you die during the GRAT term, the assets revert to your estate, and there’s no tax benefit.
GRAT Example
You place $5 million of stock into a 5-year GRAT.
You receive $1 million per year (plus interest) back.
The stock grows at 8%, while the IRS 7520 rate is 4%.
After 5 years, there’s $800,000+ in appreciation, which passes to your children without gift tax.
When to Use a GRAT in New York
Ideal for:
Individuals with large estates concerned about New York estate tax (which kicks in around $6.94 million in 2025).
Those holding rapidly appreciating assets.
People comfortable surviving the GRAT term (to avoid estate inclusion).
Not ideal for:
Modest estates below the New York and federal exemption amounts.
Illiquid or unpredictable assets (as annuity payments must be made reliably).
Strategic Uses of GRATs
Rolling GRATs: Creating a new GRAT each year for multiple years reduces risk of dying during term.
Short-term GRATs: Capture value on volatile assets without committing long-term.
Combine with LLCs or FLPs: Use valuation discounts to enhance tax savings.
Pitfalls & Risks
Mortality risk: If you die during the term, no tax benefit.
Performance risk: If assets underperform the IRS rate, beneficiaries may receive nothing.
Compliance risk: GRATs must be carefully drafted to comply with IRS rules or risk disqualification.