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Your Guide to GRATs: A Tax-Savvy Trust to Leverage Before 2026

Law Office of Todd A. Wilson > Estate Planning  > Your Guide to GRATs: A Tax-Savvy Trust to Leverage Before 2026

Your Guide to GRATs: A Tax-Savvy Trust to Leverage Before 2026

Your Guide to GRATs: A Tax-Savvy Trust to Leverage Before 2026 | Austin Trust & Estate Planning Lawyer

Find Out the Advantages of Setting Up GRATs Now, Ahead of Sunsetting Estate Tax Exemptions

Grantor retained annuity trusts (GRATs) may offer some distinct advantages if you set them up before Dec. 31, 2025. That’s because federal estate tax exemptions and gift tax exclusions will be sunsetting on January 1, 2026, if the laws don’t change between now and then. 

If or when that happens, millions of dollars in available exemptions could disappear. 

If you know what’s coming and you’ve planned ahead, you could be sitting pretty a couple of years from now, with all your ducks in a row and some tax-savvy trusts, like GRATs, already set up to protect and advance your interests. 

On the other hand, if you ignore it all, you could miss out on the chance to do more with GRATs before federal estate tax exemptions change. That could leave you with higher tax bills. It may even make Uncle Sam one of your biggest beneficiaries. 

To find out how — and how to stop that from happening while there’s still time — you can get up to speed in about 2 minutes with these GRAT FAQs:

The answers below highlight key points about grantor retained annuity trusts, so you can make an informed choice about whether or how these trusts may fit into your overall estate plan

If you need more information about GRATs, setting up trusts, administering trusts, or contesting trusts, simply contact an Austin trust attorney at the Law Office of Todd A. Wilson, also known as TAW Law Texas.

What Are Grantor Retained Annuity Trusts (GRATs)?

A GRAT is an irrevocable trust that is structured to hold certain assets while making routine annuity payments to the trust maker or grantor over a period set by the grantor. When that period is up, any assets the GRAT still holds will, then, be distributed to beneficiaries, per the terms of the trust. 

If set up and funded properly, GRATs can be extraordinarily useful tools for transferring anything from a few assets to vast amounts of wealth to beneficiaries, all without triggering estate and gift tax exemptions and liabilities. 

Keep in mind that there’s not just one “type” of GRAT. Instead, you have some options here, with (and not necessarily limited to): 

  • Short-term GRATs: These grantor retained annuity trusts are typically set for 2 to 3 years.
  • Single GRATs: With one trust set up, single GRATs are generally structured to last longer than short-term GRATs, usually 5 to 10 years (or more in some cases).
  • Rolling GRATs: The annuity payments from one grantor retained annuity trust, usually a short-term GRAT, are used to set up and fund another GRAT. That can continue, with annuity payments from the second GRAT then rolling into a third GRAT, and so on.

These and other GRATs appear in media headlines every now and again, often due to their popularity as wealth-transfer devices among the ultra-rich, including Nike Founder Phil Knight, Facebook Founder Mark Zuckerberg, and even shopping mall magnate Herb Simon. In fact, some have even called GRATs, “a major estate tax loophole.”

How Do GRATs Work?

Grantor retained annuity trusts work differently than any other trust, including intentionally defective grantor trusts (IDGTs), irrevocable life insurance trusts (ILITs), and spousal lifetime access trusts (SLATs). That’s because GRATs generally work as follows: 

  1. A grantor (let’s say you) sets up a GRAT, detailing the amount and frequency of the annuity payments that you’ll collect from the trust. By law, you’ll need to collect at least one annuity payment a year from your GRAT. That payment, however, can direct into another GRAT if you set up a rolling GRAT.
  2. You fund the GRAT, transferring certain assets into the trust. While other trusts will “own” the assets they are funded with, GRATs are generally just “holding” the asset for some period, like 2, 5, or 10 years. The grantor (you) will set this period of time when creating the grantor retained annuity trust, and it will be specified in the trust documents.
  3. You collect annuity payments from the trust while the GRAT is active. These payments are usually some percentage of the total assets held by the trust. Payments can be fixed, or they can increase over time. While GRAT annuity payments can be made in cash, they can also be rendered via “in kind” assets if the trust does not have any cash on hand. Each year the GRAT is active, you’ll cover the related income taxes.
  4. The GRAT will end up paying you the full value of the original assets that you used to fund the trust by the time it expires. In other words, the GRAT should “zero out” by the time it ends. So, if you fund a GRAT with assets valued at $1 million, the annuity payments you receive from the GRAT will ultimately total $1 million too, regardless of whether you collect a couple of higher payments or several smaller payments.
  5. Assets remaining in the GRAT after it expires are paid to the beneficiaries, without estate or gift taxes coming into play. These remaining or “leftover” funds are usually the appreciation of the assets the trust held.

Generally, GRATs work best when:

  1. Income-producing assets are used to fund the trust.
  2. GRATs are active in low-interest-rate environments.
  3. The grantor survives the trust. If the grantor passes away before the GRAT expires, the trust’s assets plus any appreciation accumulated will go back into the estate, forfeiting any tax advantages that GRAT could have offered had the grantor survived the trust.

Given how GRATs work — and the fact that estate and gift tax exemptions are dropping by roughly half as of 2026 — these trusts can provide a unique advantage, letting grantors: 

  1. Leverage the higher exclusion rates currently available.
  2. Remove certain assets and their appreciation from an estate. 
  3. Reduce the overall value of their estate to minimize potential estate tax liabilities.

What Assets Can Fund GRATs?

Grantor retained annuity trusts can be funded with various types of assets, including (but not limited to): 

Assets for GRATs - Estate Taxes & Trusts - Austin Trust Lawyer
  • Cash
  • Life insurance policies
  • Stocks and bonds
  • Business interests
  • Real estate holdings 
  • Royalties 

Generally, it’s best to fund GRATs with assets that are:

  • Expected to gain value: Appreciating assets are ideal for GRATs because the gains are paid out to beneficiaries when the trust expires. If the assets don’t appreciate, the GRAT will not have distributions to dole out to beneficiaries when the trust comes to an end.
  • Difficult to value: Hard-to-value assets can work well in GRATs because these trusts can contain terms that automatically adjust annuity payments if the IRS designates a higher value for the assets. That can minimize the valuation risks associated with these trusts. 

Why Should I Set Up A GRAT Before 2026?

Federal estate tax laws are going to change soon, and that’s why it’s generally prudent to consider setting up a GRAT now, before those changes take effect. In particular, estate tax exemptions are set to drop by ~50% in 2026. 

That’s because sunsetting tax laws will reset current exemptions, rolling them back to their 2017 levels as of Jan. 1, 2026 (if no new laws are passed before then).

So, if you take action to set up a grantor retained annuity trust before those exemptions change, you may be able to benefit from:

  • Higher estate tax exemptions: The 2024 estate tax exemptions are projected to be roughly $14 million for individuals and ~$28 million for couples. If or when the 2017 rates kick in a couple of years from now, those exemptions could fall to $7 million for individuals and ~$14 million for couples.
  • Tax advantages: Over the next two years (2024 and 2025), estate tax exemptions will grow by roughly $1 million a year (for individuals) and about $2 million a year (for couples). That leaves a couple of years to use those higher exemptions and stave off sky-high estate tax rates, which can hit a gut-wrenching 40% for taxable estates valued at $1,000,001 or more.
  • Greater flexibility: GRATs can be structured with the flexibility to exchange the assets held by the trust, so high-earning or underperforming assets can be subbed in to achieve different outcomes and goals. Ahead of 2026, that could offer far more room and flexibility to transfer vast amounts of appreciation to beneficiaries without moving the needle on gift and estate tax exemptions and liabilities.

These aren’t the only benefits of setting up GRATs before 2026, and you don’t have to be ultra-wealthy to enjoy the real advantages of these trusts before estate tax exemptions and gift tax exclusions change.

What Should I Consider Before Setting Up a GRAT?

Grantor retained annuity trusts can offer many benefits when they are set up, funded, and administered properly. That doesn’t mean, however, that these trusts are the perfect solution for everyone or every estate plan. In fact, before you set up GRATs, here are a few important issues to consider and understand: 

  • GRATs are complex trusts: GRATs are subject to IRS codes and regulations, and these trusts have to be structured in a particular way to achieve the advantages grantors expect. While setting up these trusts can require the help of an experienced trust attorney, administering them can too, especially when GRATs are active over many years or grantors set up rolling GRATs.
  • GRATs can gamble on asset appreciation: If the assets held by a GRAT do not appreciate over the term of the trust, then there is generally nothing to distribute to the designated beneficiaries. That’s why income-generating assets or items expected to grow in value are typically used to fund GRATs. Since few, if any, assets are guaranteed to appreciate, there’s generally no guarantee that grantor retained annuity trusts will have distributions to make when these trusts expire. That can make them somewhat of a gamble, but that can be managed through proper trust funding and a comprehensive estate plan.
  • Life expectancy is a concern: To fully realize the advantages of GRATs, grantors have to outlive these trusts. If they don’t, the assets held by the grantor retained annuity trust will go back into the decedent’s estate. That can negate any of the benefits that grantors were going for when they set up the trust. Nevertheless, an experienced trust attorney can get ahead of this by setting GRAT annuity payments up to transfer to a spouse upon death.
  • The laws can change at any point: New legislation could mean new rules for GRATs or new limitations that kneecap the benefits of these trusts. That’s why it’s crucial to be aware of the latest changes to the laws and how they could affect you and your estate plan. 

These factors highlight how essential it is to create and administer grantor retained annuity trusts with the help of a seasoned trusts lawyer, like the top-rated Austin trust attorneys at TAW Law Texas. We have extensive experience with all aspects of GRATs, and we are ready to share more answers that can help you decide if setting up a grantor retained annuity trust is the right move for you and your estate plan.

How Can I Get More Info About GRATs 

To find out more about GRATs and other estate planning devices that may help you before 2026, set up a free, confidential consultation with a 5-star Austin trust lawyer at TAW Law Texas.

Known for providing extraordinary counsel and estate plan solutions, our Austin lawyers have worked with countless folks, helping them create, update, administer, and contest trusts and wills. We also represent clients in probate, including probate litigation and uncontested probate.

Whether you’re considering GRATs or it’s time to set up or administer any trust, you can count on TAW Law Texas for exceptional support and representation, as well as client-centered service, unmatched value, and true peace of mind.

Discover more without paying a dime by contacting us today. 

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Todd A. Wilson

Todd A. Wilson has been practicing law since 2007, with the aim of educating all strata of society and sharing crucial insights about the importance of estate planning, probate, and more.

The Law Office of Todd A. Wilson (also known as TAW Law TX) offers affordable estate planning and probate services.