A grantor retained annuity trust (GRAT) is an irrevocable trust that you fund with property while keeping the right to receive a fixed annuity for a set number of years. When that term ends, whatever remains in the trust passes to the remainder beneficiaries named in the trust document. For federal gift-tax purposes, the taxable gift is generally the value of the property transferred minus the value of the annuity you kept. If the trust’s assets grow faster than the IRS’s assumed rate, some of that growth can pass to the remainder beneficiaries with little or no gift tax. Whether that happens depends on the trust terms, the IRS valuation rules, and how the assets actually perform.
How a GRAT works, step by step
- Create an irrevocable trust. The grantor signs a trust instrument that names a trustee and the remainder beneficiaries who receive whatever is left at the end of the term.
- Transfer property to the trust. The grantor moves assets into the trust. Once the transfer is complete, the grantor cannot take the property back.
- Retain an annuity for a fixed term. In exchange for the transfer, the grantor keeps the right to annual payments for a specified number of years. The IRS describes the annuity as a specified sum or a fixed percentage of the value of the assets transferred.
- Receive the annuity each year. The trust pays the scheduled annuity to the grantor from its assets.
- Pass the remainder. When the term ends, property left in the trust passes to the remainder beneficiaries under the trust instrument.
The annuity amount is set when the trust is funded. It does not recalculate each year on the trust’s new value. That fixed amount is the main structural difference between a GRAT and a grantor retained unitrust, which is covered below.
How the gift is measured under section 2702
Section 2702 of the Internal Revenue Code contains special valuation rules for transfers in which the donor, or a relevant family member, keeps an interest in a trust. Those rules determine whether the retained annuity can reduce the value of the gift and how that reduction is calculated.
What counts as a qualified annuity interest
The IRS describes a qualified annuity interest as a right to fixed amounts payable at least annually. A GRAT is designed to meet that definition. Treasury regulations add further conditions, including that no additional contributions may be made to the trust after the initial transfer, and that each annual payment may not exceed 120 percent of the prior year’s payment (Treas. Reg. § 25.2702-3).
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When the retained annuity qualifies, its actuarial value is subtracted from the value of the transferred property. The result is the gift:
Taxable gift = value of property transferred − actuarial value of the retained annuity
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The actuarial value depends on the section 7520 rate and the IRS actuarial tables, covered in the next section.
If the retained interest does not qualify
The IRS notice on section 2702 (Notice 2003-72, published in Internal Revenue Bulletin 2003-44) states that a retained interest that does not qualify is valued at zero for gift-tax purposes. In that case the gift equals the full value of the transferred property, and the annuity provides no gift-tax reduction. A GRAT whose annuity fails the qualified-interest rules therefore loses the central benefit of the structure.
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The section 7520 rate and actuarial tables
Two IRS inputs control how the retained annuity is valued. Both change over time, so the figures that apply depend on the valuation date of the transfer.
| Input | What it does | Where to confirm |
|---|---|---|
| Section 7520 rate | Set at 120 percent of the applicable federal mid-term rate for the month containing the valuation date, rounded to the nearest two-tenths of a percent. The rate changes with the valuation month. | IRS actuarial tables page |
| Actuarial tables | The IRS’s current tables are the 2010CM tables, which apply to valuation dates on or after June 1, 2023. Valuation dates before that date are not governed by these tables. | IRS actuarial tables page |
This guide does not list a current section 7520 rate. A rate quoted in an article can be out of date within a month, so check the rate for the month of your valuation date before relying on any calculation.
GRAT or grantor retained unitrust?
The grantor retained unitrust (GRUT) is the closest relative of the GRAT. The two are often compared because they both let the grantor keep an income stream from property transferred to a trust, but the payment formula differs.
| Feature | GRAT | Grantor retained unitrust |
|---|---|---|
| Payment basis | A specified sum or fixed percentage of the value of the assets originally transferred | A fixed percentage of the trust assets’ net fair market value, determined annually |
| Does the payment change as trust value changes? | No. The annuity is set when the trust is funded. | Yes. The payment moves with the annual valuation. |
| Gift-tax valuation framework | Qualified annuity interest valued under section 2702 using section 7520 actuarial rules | Not stated in the IRS description cited for this guide |
When comparing the two, the relevant questions are the payment formula, the asset-growth assumption behind the plan, the term and survival risk, the gift valuation, and the estate-tax treatment. These are analytical dimensions, not evidence that one structure is generally superior.
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Income-tax treatment: grantor trust status
The IRS describes the GRAT in its trust guidance this way: “For federal tax purposes, this trust is treated as a grantor trust.” (IRS, Special Types of Trusts). For a grantor trust, the grantor generally reports the trust’s income on a personal return rather than the trust paying tax on it. Grantor-trust status is a separate question from gift and estate tax, and state income-tax rules may differ.
If the grantor dies during the term
Gift-tax treatment is only part of the picture. The IRS’s instructions for Form 706 identify section 2702 as a special valuation rule and flag possible consequences for estate valuation. IRS regulatory material in Internal Revenue Bulletin 2011-50 addresses retained annuity interests under section 2036, including graduated interests.
In practice, if the grantor dies before the term ends, some or all of the trust property may be included in the grantor’s gross estate. The outcome depends on the trust instrument and the estate-tax provisions in effect at death. A GRAT is not automatically outside the grantor’s estate, so the estate-inclusion analysis should be done as a separate step from the gift-tax calculation.
Risks and limits of the structure
- Irrevocability. The grantor generally cannot reclaim the property or redirect the remainder once the trust is funded.
- Asset performance. If the trust’s assets do not grow faster than the section 7520 rate assumed at funding, little or nothing may remain for the remainder beneficiaries.
- Payment obligations. The trust must be able to make the scheduled annuity payments each year. Doing so can require selling assets or distributing property in kind.
- Valuation accuracy. An error in the rate, the table, or the value of the transferred property changes the taxable gift.
An open IRS question on high annuities and small remainders
The IRS’s 2026 priority guidance plan, published in Internal Revenue Bulletin 2026-01, lists an unresolved section 2702 question: whether an annuity interest qualifies when annual payments exceed 50 percent of the initial net fair market value of the transferred property, or when the remainder interest is below 10 percent. Both thresholds describe the outer edges of annuity design. As of October 2026, the IRS has listed this as a question for future guidance. It is not a final prohibition, and it is not a settled safe harbor. Confirm whether later guidance has addressed it before relying on either threshold.
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This is a general explanation of U.S. federal tax treatment, not individualized legal or tax advice, and state rules may differ. Before funding a GRAT, bring specifics to a qualified estate-planning attorney and tax adviser:
Quick Recap
- Which assets would fund the trust, and what growth rate is realistic for them
- The annuity term and annual payment, and whether the annuity qualifies under section 2702 for your valuation date
- The section 7520 rate and actuarial table for your valuation month
- The estate-inclusion exposure if the grantor dies during the term
- Who the remainder beneficiaries are, and how the trust instrument handles a death during the term
- Whether the open 2026 section 2702 question affects the design under consideration
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