Grantor Retained Annuity Trusts

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If you own a growing business, a significant investment portfolio, or real estate in Atlanta, you may be wondering how to pass that wealth to your children or grandchildren without losing a large chunk to federal estate taxes. A Grantor Retained Annuity Trust, or GRAT, is one of the most effective tools available for doing exactly that. At Slowik Estate Planning, located in Atlanta, Georgia, we help families across the metro area understand how these trusts work and whether they fit into a broader estate plan. This page walks you through the key facts about GRATs, how federal and Georgia law apply, and what you should know before moving forward.

Table of Contents

What Is a Grantor Retained Annuity Trust?

A Grantor Retained Annuity Trust is a type of irrevocable trust used in estate planning to transfer appreciating assets to beneficiaries while minimizing estate and gift tax liability. That is a mouthful, so let us break it down simply. You, as the grantor, place assets into the trust. The trust then pays you a fixed annuity each year for a set number of years. When the trust term ends, whatever is left inside the trust passes to your chosen beneficiaries.

A GRAT essentially freezes a portion of an estate’s value today while shifting the appreciation of those assets to beneficiaries potentially free of estate and gift taxes. Think of it this way. Suppose you own $2 million worth of stock in a company you believe will grow quickly. You transfer that stock into a GRAT. Over the trust term, you receive annuity payments back. If the stock grows faster than the IRS-set interest rate, the extra growth passes to your heirs with little or no gift tax owed.

The annuity payments to the grantor during the term of the trust are calculated using the IRS Section 7520 rate, also called the hurdle rate, which is based on an IRS-prescribed rate that changes monthly based on a variety of economic factors. The key is that your assets need to grow faster than that rate. A GRAT is considered a success when the assets in the trust appreciate by more than the hurdle rate in place when the trust was funded.

Under the Revised Georgia Trust Code, O.C.G.A. Title 53, Chapter 12, Georgia law governs how trusts are created, administered, and terminated within the state. A GRAT, as an irrevocable express trust, fits within the framework of Article 2 of that code, which governs express trusts. Working with an estate planning attorney in Atlanta who understands both federal tax law and Georgia’s trust statutes is essential to getting this right.

The term of a GRAT must be at least two years, and many individuals choose to keep their GRAT term short, between five and ten years, depending on their age and the types of assets held in the trust. Choosing the right term matters. If you die before the term ends, the strategy fails and the assets go back into your taxable estate. That is one of the key risks to plan around carefully.

How GRATs Work Under Federal Tax Law

Understanding the federal tax rules behind a GRAT helps you see why this strategy is so powerful. The IRS governs GRATs primarily through IRC Section 2702, which sets the rules for valuing retained interests in trusts. When you set up a GRAT, the IRS calculates the present value of the annuity payments you will receive back. That present value is subtracted from the total value of the assets you transferred in.

When the GRAT is structured properly, the value of the taxable gift is reduced, or in some cases eliminated, due to the calculation of the grantor’s retained annuity interest. This allows high-net-worth individuals to shift significant wealth without fully utilizing their lifetime gift tax exemption. This is what estate planners call a “zeroed-out GRAT.” You structure the annuity payments so that their present value equals the value of the assets you put in. The IRS expects nothing to be left over for your heirs. But if your assets grow faster than the IRS assumes, something is left over, and that remainder passes to your heirs tax-free.

A GRAT is treated as a grantor trust, which means all income, gains, and losses flow through to the grantor and are included on the grantor’s personal income tax return. This effectively allows more wealth to shift to heirs, because neither they nor the trust will bear the responsibility of these payments. The IRS has ruled that when the grantor pays the income taxes, there is no additional gift made to the GRAT. That is a significant benefit. You are essentially paying the trust’s tax bill out of your own pocket, which further reduces your taxable estate while leaving the trust assets to grow untouched.

It is also important to understand what happens to the cost basis of assets inside a GRAT. Under Rev. Rul. 2023-2, the IRS addressed this directly. Because a GRAT is funded with a completed gift for gift tax purposes, the assets inside the trust are generally not included in the grantor’s gross estate under IRC Chapter 11. This means that under IRC Section 1014, the trust assets do not receive a step-up in cost basis at the grantor’s death. The basis of the asset immediately after the grantor’s death remains the same as it was immediately before death. This is a real planning consideration. Your attorney at Slowik Estate Planning will help you weigh this carefully against the estate tax savings the GRAT provides.

Under IRC Section 671, when the grantor is treated as the owner of the trust for income tax purposes, the taxable income and credits of the trust are included in the grantor’s own tax return. This is consistent with how a GRAT operates throughout its term. The grantor reports all trust income personally, which keeps the trust assets growing without being reduced by tax payments.

GRATs and the Georgia Tax Environment in 2026

Georgia is one of the most tax-friendly states in the country for estate planning purposes. Georgia has no inheritance tax. Georgia does not have an estate tax. As a result, when passing assets on, you won’t owe Georgia estate taxes. That is good news for Atlanta families. However, federal estate tax is still a very real concern, especially in 2026.

The federal estate tax exemption is $15 million in 2026, up from $13.99 million for 2025. This increase came through the One Big Beautiful Budget Act (OBBBA), which set the new exemption at $15 million per person, indexed for inflation going forward. Under the OBBBA, the exemption will be $15 million per person starting January 1, 2026, indexed for inflation. Because the exemption is per person, married couples can effectively give away double that amount.

Even with a higher exemption, GRATs remain a valuable tool. Why? Because if your estate is likely to grow significantly over the next decade, locking in today’s values and shifting future appreciation out of your estate makes long-term sense. Leaving assets in your estate to appreciate during your lifetime may increase your estate tax bill. If you have already utilized your current available lifetime gift tax exemption, making an outright transfer and triggering gift tax might not be the most desired option. A GRAT sidesteps that problem entirely.

Georgia also has no gift tax. The federal gift tax has an exemption of $19,000 per recipient for 2026. This annual exclusion is separate from your lifetime exemption. A GRAT works alongside these other tools. You can still make annual exclusion gifts while also running a GRAT, giving you multiple ways to move wealth out of your estate at the same time. Contact Slowik Estate Planning in Atlanta, Georgia, to talk through how all of these pieces fit together for your specific situation.

Who Should Consider a GRAT in Atlanta?

A GRAT is not the right tool for everyone. It works best in specific situations. So, who is it designed for? Families may choose a GRAT to pass on assets expected to appreciate in value but that they don’t necessarily want to gift away outright. GRATs are particularly helpful for families that have fully utilized their available estate-tax exclusion. If you have already used up your lifetime gift tax exemption and still have growing assets you want to transfer, a GRAT gives you a path forward.

Consider a scenario (for illustration purposes only) where a business owner in Atlanta holds $3 million in closely held company stock. She expects that stock to double in value over the next five years. She transfers the stock into a two-year rolling GRAT. Each year, she receives annuity payments back. If the stock grows faster than the IRS Section 7520 rate, the excess appreciation passes to her children with no additional gift or estate tax. She can keep rolling that strategy with new GRATs as each one matures. This is sometimes called a “rolling GRAT” strategy. A rolling GRAT is a series of short-term GRATs that reinvest annuity payments into new GRATs. Past results in hypothetical examples do not guarantee similar outcomes for any individual client.

Assets commonly placed into GRATs include stocks, hedge fund investments, closely-held business interests, or real estate. In Atlanta’s active real estate market, commercial or investment property that is expected to increase in value could be an excellent candidate. The same goes for concentrated stock positions in publicly traded companies.

One important limitation to keep in mind: inherent with a GRAT is the potential for some or possibly all of the transferred assets to be included in the grantor’s estate in the event of his or her death before the end of the GRAT term. This is why term length and the grantor’s age and health are important planning factors. An Atlanta estate planning lawyer at Slowik Estate Planning can help you choose a term that balances risk and reward based on your personal circumstances.

GRATs also work well alongside other planning tools. For example, if you have a trust that benefits family members, careful coordination between the GRAT remainder and your trust beneficiaries is essential. Similarly, if you have a pet or other dependents you want to provide for, tools like pet guardianships can be woven into a broader plan that includes a GRAT.

GRAT Administration and Ongoing Responsibilities

Setting up a GRAT is just the beginning. Once the trust is funded and the term begins, there are ongoing responsibilities that must be handled correctly. After the initial GRAT funding, no additional contributions can be made. The trust is locked in with the assets you placed into it at the start. That means choosing the right assets at the outset is critical.

Each year during the trust term, the trustee must pay the required annuity to the grantor. During the term of the GRAT, you are treated as the owner of the assets for income tax purposes. You are responsible for paying income tax on the GRAT income. Paying income taxes on behalf of the GRAT is not considered an additional gift to the GRAT. This is actually a feature, not a burden. By paying the tax yourself, you are indirectly making an additional tax-free transfer to the trust, because the trust does not have to use its assets to pay taxes.

The annuity payments themselves must meet IRS requirements. Under IRS Revenue Procedure 2003-42, the IRS has published sample GRAT language to help ensure trusts qualify under Section 25.2702-3 of the Treasury Regulations. The annuity must be paid at least annually, and it cannot be prepaid. Annuity payments cannot increase more than 20% from the prior year’s payment. These rules must be followed precisely for the GRAT to qualify for its intended tax treatment.

Proper trust administration throughout the GRAT term is not optional. Failing to make required annuity payments on time or in the correct amount can jeopardize the entire strategy. Georgia’s Revised Trust Code under O.C.G.A. Title 53, Chapter 12, Article 11 governs the duties and responsibilities of trustees, including record-keeping, accounting, and prudent investment standards under Article 16. The trustee must manage the trust assets in accordance with these standards throughout the GRAT term. Slowik Estate Planning works with clients to ensure that GRAT administration stays on track from start to finish.

At the end of the GRAT term, if the grantor is still living and the assets have outperformed the Section 7520 rate, the remaining assets pass to the named beneficiaries. At the end of the GRAT term, the remainder will transfer to your beneficiaries. This transfer will have no effect on your estate tax and will not be taxable to your beneficiaries. That is the payoff for careful planning and disciplined administration throughout the trust’s life.

FAQs About Grantor Retained Annuity Trusts in Atlanta, Georgia

What happens if I die before the GRAT term ends?

If you pass away during the GRAT term, the trust assets are generally pulled back into your taxable estate. If you die during the GRAT term, the assets go back to your estate, negating the transfer tax benefits. This is called the “mortality risk” of a GRAT. It is one of the main reasons estate planners often recommend shorter GRAT terms for older or less healthy grantors. At Slowik Estate Planning in Atlanta, Georgia, we help clients choose a term length that reflects their realistic life expectancy and planning goals. No outcome can be guaranteed, and each plan must be tailored to the individual.

Can I put any type of asset into a GRAT?

Many types of assets can be placed into a GRAT, but some work better than others. Assets commonly placed into GRATs include stocks, hedge fund investments, closely-held business interests, or real estate. Assets that are expected to grow quickly are the best candidates, because the whole point is to outpace the IRS Section 7520 hurdle rate. Highly volatile assets can also work well because of the asymmetric risk profile of a GRAT. If the assets do poorly, you simply get them back through your annuity payments. If they do well, the excess passes to your heirs tax-free. Your attorney at Slowik Estate Planning can help you evaluate which assets in your portfolio are the best fit.

Does Georgia have its own estate or gift tax that affects a GRAT?

Georgia has no inheritance tax. Georgia also has no gift tax. This means that when you fund a GRAT, you are only dealing with federal gift and estate tax rules, not any state-level tax in Georgia. The federal gift tax applies to the initial transfer into the GRAT, but a properly structured zeroed-out GRAT can reduce the taxable gift to near zero. Georgia residents benefit from this simplified tax environment, but federal rules still apply and must be followed carefully. Slowik Estate Planning, based in Atlanta, Georgia, helps clients plan around federal tax obligations within Georgia’s favorable state tax framework.

Will the assets in my GRAT receive a step-up in basis when I die?

Generally, no. Under IRS Revenue Ruling 2023-2, assets held in an irrevocable grantor trust that are not included in the grantor’s gross estate for federal estate tax purposes do not receive a step-up in basis under IRC Section 1014 at the grantor’s death. The ruling confirms that because the assets were transferred as a completed gift and are not part of the probate estate or includible in the gross estate under Chapter 11 of the Internal Revenue Code, the basis immediately after death remains the same as the basis immediately before death. This is an important trade-off to discuss with your attorney. The estate tax savings from a successful GRAT often outweigh the loss of a step-up in basis, but that analysis depends on your specific facts and asset values.

How do I get started with a GRAT in Atlanta?

The first step is to have a conversation with an estate planning attorney who can review your assets, your family goals, and your current tax situation. A GRAT involves federal tax law, IRS interest rate timing, trust drafting under Georgia law, and ongoing administration requirements. All of these pieces need to work together. Slowik Estate Planning, located in Atlanta, Georgia, works with individuals and families to design estate plans that include tools like GRATs where they make sense. We encourage you to reach out to our office to schedule a consultation. We will walk you through your options, explain the trade-offs honestly, and help you build a plan that fits your life. Every client’s situation is different, and results will vary based on individual circumstances.

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