By Harry Prabandham · Updated September 27, 2026
Estate & Legacy
GRATs for Concentrated and Pre-IPO Stock
A GRAT is an irrevocable trust that pays you an annuity for a set term; growth above the IRS 7520 rate can pass to heirs with little or no gift tax.
GRATs for Concentrated and Pre-IPO Stock
1 / 7
The short answer
- A grantor retained annuity trust (GRAT) is an irrevocable trust you fund with assets while keeping fixed annuity payments for a set number of years.
- When the term ends, whatever is left after the annuity payments passes to your beneficiaries, often a trust for children.
- The IRS values the gift using the Section 7520 rate, so only growth above that hurdle transfers out of your estate.
- GRATs are governed by Internal Revenue Code Section 2702 and need an estate planning attorney to draft and administer.
Try Our Free Tools
Full Guide
The short answer
- A grantor retained annuity trust (GRAT) is an irrevocable trust you fund with assets while keeping fixed annuity payments for a set number of years.
- When the term ends, whatever is left after the annuity payments passes to your beneficiaries, often a trust for children.
- The IRS values the gift using the Section 7520 rate, so only growth above that hurdle transfers out of your estate.
- GRATs are governed by Internal Revenue Code Section 2702 and need an estate planning attorney to draft and administer.
How does the math work?
- The gift equals the value contributed minus the present value of your annuity, discounted at the 7520 rate for the funding month.
- A zeroed-out GRAT sets the annuity so this gift is near zero, which uses little or none of your lifetime exemption.
- The 7520 rate is 120% of the federal mid-term rate; it was 5.4% for September 2026 and 5.6% for October 2026.
- If the assets grow faster than the hurdle, the excess goes to beneficiaries; if not, the assets largely come back to you through the annuity.
Why do holders of concentrated stock consider GRATs?
- Volatile assets suit GRATs because a single strong period can move significant value while weak periods cost mainly fees.
- Pre-IPO shares can be contributed at an appraised private value, so any later increase above the hurdle may pass to heirs.
- Rolling short GRATs, often two years each, re-contribute annuity shares into new trusts to capture separate periods of growth.
- The grantor pays income tax on trust income during the term, which lets the trust assets compound without that drag.
What are the main risks?
- If you die during the term, some or all of the trust assets are generally pulled back into your taxable estate.
- Legal, appraisal, and administrative costs are spent whether or not the GRAT transfers anything.
- Beneficiaries take your original cost basis, so they may owe capital gains tax that a step-up at death would have avoided.
- Congress has considered minimum terms and other limits on GRATs; current law could change for future trusts.
Operating rules and reporting
- You cannot add assets to an existing GRAT, and annuity payments can rise no more than 20% per year.
- Annuity payments can be made in shares, but each in-kind payment requires a current valuation, which is harder for private stock.
- Funding a GRAT is reported on a gift tax return, Form 709, even when the gift is near zero.
- GRATs are a poor fit for generation-skipping planning because exemption generally cannot be allocated until the term ends.
How does a GRAT compare with other options?
- With a $15 million per-person federal exemption in 2026, some families simply make outright gifts and skip the GRAT's hurdle.
- An installment sale to an intentionally defective grantor trust uses a lower interest rate hurdle but requires seed capital and more complexity.
- GRATs appeal when someone wants to save exemption or cannot predict which asset will appreciate most.
- The right structure depends on estate size, liquidity, age, health, and family goals.
Key takeaways
- A GRAT transfers only growth above the 7520 rate, which is reset monthly and was 5.4% to 5.6% in September and October 2026.
- Its value depends on the grantor surviving the term and the assets outpacing the hurdle; neither is certain.
- Costs and administration are real even when the trust passes nothing to heirs.
- This is general education, not tax or legal advice; work with an estate attorney and CPA on any GRAT.
Related Topics
Estate & Legacy
Estate Planning Beyond the Basics: Exemptions, Trusts, and Transfer Tools
Past a basic will, estate planning coordinates trusts, titling, and gifting with the 2026 federal exemption of $15 million per person and state rules.
Estate & LegacyCore Estate Planning Documents and the People You Name
A basic estate plan combines a will or trust, beneficiary designations, and powers of attorney, plus the people chosen to carry them out.
Estate & LegacyEstate Planning Checkup for New Retirees
Retirement is a natural time to refresh documents, beneficiary forms, and gifting plans, especially with the $15M federal exemption set for 2026.