GRAT (Grantor Retained Annuity Trust)
An irrevocable trust where you transfer assets and receive fixed annual payments for a set period. If the assets grow faster than the IRS interest rate, the excess passes to beneficiaries tax-free. It is a sophisticated estate tax reduction strategy.
Legal Definition
An irrevocable trust under IRC ยง2702 in which the grantor retains a qualified annuity interest for a specified term, with the remainder passing to beneficiaries, valued for gift tax purposes at the fair market value of the transferred property minus the present value of the retained annuity.
Practical Example
A business owner transfers $10 million in company stock to a GRAT. She receives annual payments of $2.1 million for 5 years. If the stock grows 15% annually during that period, about $4 million passes to her children tax-free after the annuity payments.