Money Moves: GRAT

What if you could transfer millions in future wealth to your family while using little or none of your lifetime gift tax exemption? For high-net-worth individuals with fast-growing assets, this is possible. It's a well-established estate planning strategy known as a Grantor Retained Annuity Trust (GRAT).

For tech professionals, founders, and executives with equity-heavy portfolios, a GRAT can shift future appreciation to the next generation. You keep a stream of payments, and much of your exemption remains intact for later use.

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The Strategy: Grantor Retained Annuity Trusts (GRATs)

A GRAT is an estate planning vehicle designed to move future asset growth out of your taxable estate.

1. You contribute assets to an irrevocable trust.

2. You receive fixed annuity payments for a set term.

3. At the end of the term, any remaining value passes to your beneficiaries, typically children or a trust for their benefit.

The IRS assumes the trust assets will grow at a set rate, called the Section 7520 rate. Any growth above that rate passes to your heirs free of additional gift tax. GRATs are often structured so the gift value is close to zero, which preserves your lifetime exemption.

Key Features of a GRAT

• Fixed annuity payments back to the grantor, which can be paid in cash or in kind (for example, by returning shares)
• A defined trust term, often two to ten years
• Appreciation above the IRS hurdle rate passes to heirs
• The grantor pays the trust's income taxes during the term, effectively an additional tax-free transfer to beneficiaries

In essence, a GRAT lets you retain cash flow while shifting upside to the next generation.

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Eligibility: Who Should Consider a GRAT

GRATs are most effective for individuals with specific financial and estate planning characteristics.

Ideal Candidate Profile

• Owns assets with strong appreciation potential, such as pre-IPO shares or concentrated stock positions
• Has a clear estate planning objective
• Is comfortable with irrevocable trust structures
• Has sufficient liquidity outside the GRAT

Key Requirements

• The grantor must survive the term of the trust. If not, the assets are generally included in the estate. In that case, you are mostly back where you started, minus planning costs, which is why GRATs are often described as low-downside.
• Assets must outperform the Section 7520 rate. If they don't, the assets simply return to the grantor through the annuity payments.
• Annuity payments must be made on schedule.
• The structure must be properly drafted, valued, and administered. For private company stock, that includes a qualified appraisal.

Timing Matters

• GRATs tend to be more effective when interest rates are lower, because the hurdle rate is easier to beat.
• Funding a GRAT when asset values are temporarily low, such as before a financing round, liquidity event, or market recovery, can significantly improve outcomes.

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Money Moves in Real-Life: Turning Pre-IPO Equity Into a $6.9 Million Wealth Transfer Using a GRAT

The following is a hypothetical composite for illustration only. It does not represent an actual client or guarantee similar results.

👤 Client Background

"Maya," 42, is a co-founder and CTO of a venture-backed software company preparing for a possible IPO within two years. She is married with two young children. Most of her net worth is tied up in founder shares, and she projects that her estate will far exceed the federal exemption if the company succeeds.

🎯 Motivation

Maya expected her company's valuation to rise significantly around a public listing. She wanted to move that potential growth to her children without using a large share of her lifetime exemption. She also wanted to keep economic exposure to her shares in case the IPO was delayed.

⚙️ Process

1. Valuation. Working with her estate attorney and our team, Maya obtained a qualified appraisal of her shares, valuing a block at $5 million.

2. Design. Her attorney drafted a two-year "zeroed-out" GRAT. At an assumed 5.0% Section 7520 rate, the trust pays her roughly $2.69 million per year. The taxable gift is close to zero.

3. Liquidity check. We confirmed that Maya's cash, salary, and other holdings could cover her lifestyle needs and the income tax on the trust's activity.

4. Administration. Because her shares were illiquid, the annuity payments were planned in kind. The trust would return shares to Maya at each payment date, valued at the time.

5. Coordination. We aligned the GRAT term with her equity compensation plan, including lockup periods and her 10b5-1 trading plan considerations after the IPO.

✅ Outcome / Results

In this hypothetical, the shares grew about 60% in year one and about 80% in year two after the IPO. After both annuity payments, roughly $6.9 million remained in the GRAT and passed to a trust for her children.

• Maya used almost none of her lifetime exemption.
• At a 40% estate tax rate, this represents a potential estate tax savings of about $2.76 million.
• The shares returned to her through the annuity payments could be placed into a new GRAT, continuing the strategy.

Had the IPO stalled and the shares not outperformed the hurdle rate, the assets would simply have returned to Maya. Her main cost would have been legal and appraisal fees.

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5 Key Takeaways

1. Estate tax efficiency depends on asset growth exceeding IRS assumptions.

2. Survival of the trust term is critical, but the downside of falling short is limited.

3. Asset selection drives results.

4. Retained annuity payments make GRATs practical for active earners.

5. Precision in design, valuation, and timing matters.

Conclusion

GRATs are not about eliminating taxes. They are about transferring future growth efficiently and intentionally. For clients with concentrated equity and long-term estate goals, a GRAT can be one of the most effective tools available.

Advanced Tip!

GRATs are especially powerful when paired with equity compensation planning around IPOs, secondary sales, or post-vesting concentration risk. Many clients use rolling GRATs, a series of short-term GRATs funded with each annuity payment. This approach captures upside in strong years and limits the impact of weak ones.

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Curious whether a GRAT fits into your broader equity or estate plan? Schedule a consultation to explore how this strategy could work for you.

This content is for informational purposes only and does not constitute tax, legal, or investment advice. GRATs involve complex tax rules; consult a qualified estate attorney and tax advisor before implementing any strategy.

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Case studies presented are purely hypothetical examples only and do not represent actual clients or results. These studies are provided for educational purposes only. Similar, or even positive results, cannot be guaranteed. Each client has their own unique set of circumstances, and some products and strategies may not be suitable for all people. Please consult with your financial advisor before implementing any strategy discussed herein.