Contact Us
Firm Overview
Why Legend Is Different
Client Types
Professional Biographies
Frequently & Rarely Asked Questions
Risk Spectrum
Investment Strategies
Second Opinion
Global Investment Pulse
Event Calendar
Press Center
Legend News
Clients Only
Career Opportunities
Newsletter Sign-up
Site Search
Site Map
Tell A Friend About This Website
Financial Briefs


Phone: (412) 635-9210
  (888) 236-5960
Connect With Legend:
Subscribe to me on YouTube

Why Do GRATs Remain In Such High Demand?

The “death” of the grantor-retained annuity trust—commonly known as a GRAT—has been greatly exaggerated.  In fact, GRATs may be reaching their zenith in popularity due to recent developments.  Nevertheless, you are well advised to keep an eye on a revenue-hungry Congress which in the past has threatened to reduce or eliminate GRAT benefits.

With a GRAT, you may be able to transfer a significant amount of your wealth to your heirs without much in the way of estate and gift tax consequences, taking full advantage of current laws. 

Here how it works:  As the “grantor,” you transfer assets into the trust while retaining the right to receive annual annuity payments for a specified number of years.  When the term of the GRAT ends, the remainder is distributed to the beneficiaries you’ve named, who are typically your children and/or grandchildren (OR TRUSTS FOR THEIR BENEFIT).

The amount of the annuity payment you receive during the term of the GRAT is calculated using a special interest rate—called the Section 7520 rate—established at the outset.  The Section 7520 rate is adjusted by the government on a monthly basis.  This is one of the key factors currently affecting the popularity of GRATs.  For June 2013, the Section 7520 rate was set at a miniscule 1.2% (see chart for first half of 2013).

Thus, for a transfer occurring in June 2013, all future growth above 1.2 percent is effectively transferred to the designated beneficiaries of the trust.  That's because all of the present value of what was transferred into the GRAT would be returned to you, in the form of annuity payments.  Ordinarily, the transfer of assets by an individuals to an irrevocable trust would be deemed to be a gift for federal gift tax purposes.  However, in theory since all of the GRAT assets could revert to you, assuming the assets don't appreciate by more than the Section 7520 rate, the gift is valued at zero for tax purposes.  This technique is known as “zeroing out” a GRAT.”

With this approach, you're hoping that the appreciation in value of the assets transferred to the GRAT will exceed the Section 7520 rate, a pretty safe bet when the rate is only 1.2 percent.  While you continue to receive the annuity payments based on a relatively low rate during the GRAT term, the beneficiaries will be entitled to receive the appreciation in excess of the Section 7520 rate. Generally, you would prefer to transfer assets to the GRAT that you would reasonably expect to appreciate substantially in value. Conversely, you might hold onto other assets projected to have a lower rate of appreciation.

Does this estate planning device sound too good to be true?  It’s not, but you should be aware that there are possible downsides to setting up a GRAT, including the following: 

1.  No one can guarantee absolutely that the assets will appreciate in value at a rate higher than the Section 7520 rate.  Even with a low 1.2% rate, it’s possible that some assets may grow at a lower rate or the GRAT even could suffer a loss.  In that case, you receive the trust assets back at their depreciated value without any tax consequence.  In essence, the GRAT “failed” to produce an estate tax savings.

2.  You might die during the GRAT term.  If that should happen, all of the assets transferred to the GRAT, plus any earnings, will revert to your taxable estate.

3.  If you use professional services, you will incur fees for establishing and administering a GRAT, usually based on a percentage of assets in the trust.

Be mindful that legislation has been proposed in Congress in recent years that would have affected GRATs adversely, particularly with regard to the zeroing-out technique.  The same or similar proposals are likely to be raised again.  If you’re contemplating the use of a GRAT, you might want to move quickly before Congress strikes. 


  • Everything You've Learned About Interest Rates May Be Wrong
  • Inflation: A Portfolio Risk That Never Dies
  • Understanding Economic Fundamentals
  • A Bright Outlook For Consumer Spending
  • Six Tips To Avoid Phishing Scams
  • Seven Steps To Protect Yourself After Data Breach
  • Dynasty Trusts: The Gift That Just Keeps On Giving
  • Getting A High Tax Grade For Higher Education Credits
  • How Social Earnings Taxation Has Changed
  • Why Aren't More Millennials Moving On Up And Out?
  • Taking Socially Responsible Investing To The Next Level
  • Don't Be Caught Red-Handed By The Wash Sale Rule
  • Leading Economic Indicators Hit 10-Year High
  • Avoid These 6 Mistakes In Stretch IRA Planning
  • More Flexibility Allowed In Flex Spending Accounts
  • Individual Bonds-Ugh!
  • Set Aside The Funds One Might Need For A Rainy Day
  • Protect Against Possible Terrorist Attack
  • U.S. Leading Economic Indicators Rose Again
  • Fed Chair Strikes A More Cautious Tone, But Still Expects Moderate Growth
  • Count Off 3 Tax Breaks For Higher Education
  • Don't Be Victimized By These 10 Common Scams
  • Retirement Plan Choices For The Self-Employed
  • New Law Says Tax Debtors May Lose Their Passports
  • Compare Minor's Account To 529 Plan
  • Are You Being Socially Responsible?
  • 8 Smart Moves For College Grads
  • Seeking Financial Aid: Don't Fear The FAFSA
  • New Baby? Consider An Education Savings Plan
  • 3 Ways To Deduct Mortgage Interest
  • Understanding Deflation
  • Don't Play Up Super Bowl Outcome In Stock Decisions
  • When Should Millennials Start Retirement Saving?
  • Have Your Child Kick Into A Roth With A Reward To Boot
  • Sizing Up The Energy Boost To The Economy
  • A Stock Plunge Amid Strong Economic Data
  • 14 Top Year-End Tax Moves For Individuals In 2014
  • Drill Down For Three Key Oil And Gas Tax Breaks
  • When It Pays To ID Security Sales
  • GDP Growth Data Masks Strength Of The Recovery
  • Be On The Lookout For Crimes Involving An Elder Fraud
  • S&P 500's New All Time High Wednesday Will Probably Continue Over Upcoming Months, But Other Indexes Are Struggling
  • U.S. Stock valuations are within the top 10 valuations of all time but probably won't crash. Why?
  • Seven Steps To Digging Your Way Out Of Deep Debt
  • 5 Steps To Protect The Digital Assets You Own
  • The Long-Term Fiscal Status Of The United States
  • Margin Debt At Record Levels
  • What To Do When You're Suddenly Widowed
  • A Common Error In Powers Of Attorney
  • Should You Move To A Different State?
  • Tax Cost Of Being Your Own Landlord
  • Why Do GRATs Remain In Such High Demand?
  • Don't Wait To Harvest Your Losses
  • The Best States To Move To For Tax Purposes
  • 10 Reasons For The IRS To Flag Your Return
  • Many Women Face Special Challenges As Retirement Nears
  • Nine Reasons To Consolidate Debt
  • Straight Talk About Living Trusts
  • SEPPs From An IRA: Don't Change Horses Midstream
  • New Regulations Fill In Gaps On 3.8% Surtax
  • Do You Know Life Insurance Basics?
  • Top Income-Earners Drive U.S. Economic Growth
  • Give IRA Cash To Charity: Heads You Win, Tails You Win
  • Four Wash Sale Strategies To Help Clean Up Taxes
  • College Savings: How Much Do You Need Each Month?
  • Surprising New Research: Large Caps Top Small Caps
  • Newly Widowed Face 401(k), IRA Options
  • Retirement Saving Takes Time And Must Be A Priority
  • Divide-Conquer To Convert To Roth IRA
  • What Is Probate And What Does It Protect?
  • A Research Surprise On Bond Funds
  • After New Tax Law, Do You Still Need A Bypass Trust?
  • Start Estate Planning For Your Child Now
  • Seven Tax Ideas To Use Throughout The Year
  • A Comprehensive Way To Plan For College Savings
  • Bulletproofing Your Will Before Death
  • IRS Mercy on 60-Day IRA Rollover Error
  • Feds Warn Of Life Settlement Dangers
  • Know The Tax Rules On Charitable Gift Deductions
  • IRS Ruling Boosts IDTs as Estate Planning Technique
  • A Defined Benefit Plan Lets You Sock Away Large Amounts If You Can Overcome Some Obstacles
  • Economic Shifts Bring New Pitfalls And Prizes
  • Evaluating Great Companies
  • Inflation Versus Deflation
  • Jeremy Grantham And Lou Stanasolovich Discuss Market Valuations
  • Ramifications Of A Weakening Dollar
  • Secular Versus Cyclical Bear Markets
  • Small Business And Work Opportunity Tax Act
  • Time To Plan For Estates, Wills, & Trusts

  • ©2018 Legend Financial Advisors, Inc.®. All rights reserved.