Latest / The High Net Worth Podcast with Fexingo: Wealth Management, Tax Strategy, and Affluent Finance / How Ultra-Wealthy Families Use Grantor Retained Annuity Trusts
Transcript
- Lucas: So let's say you're a founder who built a company worth fifty million dollars. You've got kids you want to leave it to, but you don't want to give up control while you're still running the show, and you definitely don't want to pay gift tax on the full value. That's the exact scenario where a Grantor Retained Annuity Trust — a GRAT — becomes one of the most elegant tools in the estate planner's kit. Luna: GRATs have been around for decades, but they got a lot of attention during the low-interest-rate years. Why are they suddenly back in the conversation now? Lucas: Right, because the magic of a GRAT depends on the Section 7520 rate — the IRS assumed rate of return. When rates were near zero, you could set a GRAT with a very low hurdle, and almost any appreciation would pass to heirs tax-free. Rates are higher now — the July 2026 rate is about 4.6 percent — but that still makes GRATs attractive if you have assets you expect to grow faster than that. Luna: Walk us through the mechanics. How does it actually work? Lucas: You take an asset — say ten million dollars worth of your company stock — and transfer it into an irrevocable trust. The trust pays you an annuity for a set number of years, typically two to ten. The annuity is calculated so that the present value of all those payments equals the value of the asset you contributed, leaving the remainder — the 'remainder interest' — essentially zero for gift tax purposes. That's called a zeroed-out GRAT. Luna: So if the asset grows faster than the IRS rate, the excess goes to your beneficiaries with no gift tax. And if it doesn't, you just get your annuity payments back, and the trust is essentially a wash. Lucas: Exactly. That's the beauty — there's very little downside. The worst case is you get your money back and you're out the legal fees. The upside can be enormous. There's a famous example from the early 2000s: a tech billionaire put shares of his company into a series of rolling two-year GRATs. The stock went up something like tenfold over that period. The appreciation passed to his children completely free of gift and estate tax. Luna: And that's why some people call GRATs the 'Google trust' — because that specific strategy was used heavily by early Google employees. But isn't there a catch, especially when it comes to voting control? Lucas: Right, that's the trade-off. Once you put stock into a GRAT, you no longer own it — the trust does. So you lose direct voting rights unless you structure the trust to retain certain powers, or unless the stock is non-voting. Many founders use non-voting shares for the GRAT and keep the voting shares personally. That way they retain control of the company while shifting economic appreciation. Luna: And then there's the mortality risk. If you die during the GRAT term, the whole thing comes back into your estate, right? Lucas: That's the big one. If the grantor dies during the annuity period, the trust assets are included in their estate for estate tax purposes. So you typically want a relatively short term — two or three years — to minimize that risk. You also choose a grantor who's in good health. And you can set up multiple overlapping GRATs to spread the risk. Luna: I've seen data that shows GRAT usage has tripled over the past decade. A Treasury report from 2024 estimated that the top 0.1 percent of estates used GRATs to shift billions in appreciation tax-free. Lucas: That's exactly the report. And it's why the IRS and Treasury have proposed rules to limit GRATs — specifically requiring a minimum remainder interest, which would kill the zeroed-out structure. There was a proposal in 2023 that would have mandated a ten-year minimum term and a remainder value of at least 25 percent of the contributed asset. It didn't pass, but it's likely to come back. Luna: So for advisors and wealthy families listening: if you're considering a GRAT, now might be the time. Before the rules change. Lucas: Absolutely. And it's not just for public company stock. You can use GRATs for closely held business interests, real estate, even art. The key is having an independent appraiser value the asset so the IRS doesn't challenge the annuity calculation. Luna: Let's do a concrete example. Say a client puts ten million dollars of stock into a two-year GRAT when the 7520 rate is 4.6 percent. What annuity payment do they receive? Lucas: Using the IRS tables, the annuity factor for a two-year term at 4.6 percent is about 1.87. So the annual annuity payment would be roughly ten million divided by 1.87, which is about five point three five million dollars per year. Over two years, the trust pays back about ten point seven million — slightly more than the original ten million because of the interest component. But if the stock grows at, say, 15 percent a year, it's worth about thirteen point two million after two years. The trust pays the grantor ten point seven million, and the remaining two point five million passes to the children gift-tax-free. Luna: So that's a two point five million dollar tax-free transfer. On a ten million dollar asset. Not bad. Lucas: And you can do it year after year. Some ultra-wealthy families set up what's called a 'rolling GRAT' strategy — a new two-year GRAT every year, so you always have a ladder of trusts maturing. That way you capture appreciation each year and shift it out of your estate incrementally. Luna: One thing I want to highlight: GRATs are grantor trusts for income tax purposes. That means the grantor pays the income tax on the trust's earnings, which effectively allows the trust to grow tax-free. It's another layer of efficiency. Lucas: Right, so the grantor pays the tax, which reduces their own estate further — it's a win-win. But it does require the grantor to have enough outside liquidity to cover those tax bills. If the asset is illiquid, that can be a problem. Luna: And if the grantor wants to retain the ability to swap assets out of the trust? That's possible with a GRAT, too, if you structure it correctly. It gives flexibility if you want to replace low-basis stock with cash or other assets. Lucas: Exactly. The power to swap assets is a common feature. And you can also use a GRAT in conjunction with a sale to an intentionally defective grantor trust — an IDGT — for even more sophisticated estate planning. But that's a whole other episode. Luna: Speaking of which, if today's deep dive on GRATs helped you think about your own estate planning — even just a little — we want to mention something. You know how we keep this show free of ads and sponsors? That's intentional. The way we keep it going is through listener support. Lucas: Yeah, it's a small thing. If today's episode was worth a coffee to you — and honestly, even five bucks helps — you can find us at buy me a coffee dot com slash fexingo. No pressure, no perks, just knowing it helps us keep digging into these strategies. We appreciate it. Luna: Alright, back to GRATs. One more nuance: what about the GST tax? If you want to skip a generation, can you use a GRAT? Lucas: Great question. A GRAT can be designed to benefit grandchildren, but you have to allocate GST exemption to the trust at the time of funding. Otherwise, the remainder interest could be subject to generation-skipping transfer tax when it passes to grandchildren. It's doable, but you need to plan carefully. Luna: And there's also the issue of the grantor's basis. Since a GRAT is a grantor trust, the assets get a step-up in basis at the grantor's death. That can be a significant benefit if the assets have appreciated a lot. Lucas: That's a key point people often miss. The step-up in basis means that if the grantor dies holding the annuity stream, the assets in the trust get a new basis equal to fair market value. So your heirs can sell them with minimal capital gains tax. It's another reason GRATs are so popular. Luna: I think the takeaway here is that GRATs are a versatile, low-risk tool for moving appreciation out of an estate. They're not for everyone — you need a high-growth asset and a reasonable time horizon — but for the right family, they can save millions. Lucas: Absolutely. And if you're an advisor, this is a conversation worth having with clients who have concentrated stock positions or closely held businesses. Even at current 4.6 percent rates, the math works if you believe the asset will outperform. The key is acting before the regulatory window closes.