A grantor retained annuity trust (GRAT) is an estate planning instrument that allows the grantor, or donor, to transfer assets with minimal gift tax implications. Essentially, the grantor locks assets up in a trust that earns annual income, from which the beneficiary, who is typically a family member, receives the assets upon the expiration of the trust. These trusts are typically for a two-year term and the grantor may either receive a fixed annuity or a variable annuity, each of which is paid out to them in equal payments during the term of the trust.

Upon expiration, the assets within the trust are received by the beneficiary with little or no gift tax liability. The main benefit of a GRAT is that it allows the grantor to transfer assets with minimal gift tax implications while they still receive the income from the investments in the trust. This reduces their overall taxes, as the taxes owed on the income generated from the trust are sheltered from the current tax bracket.

For the most part, GRATs are used by wealthy individuals in order to minimize their tax liabilities. This is considered a tax-efficient estate planning tool for those who wish to transfer assets without needing to pay excessive taxes. Since the grantor does not pay the gift tax that would normally be owed upon transfer, they can leave more of their assets to their loved ones with fewer taxes due on those assets.

GRATs can be a great way to manage and pass on assets to the next generation while also avoiding high taxes. However, it is important to keep in mind that GRATs also have to be carefully managed in order to be effective. For example, if the assets in the trust are not generating enough income or appreciation to cover the amount of the annuity payments, then the annuity payments may need to be adjusted accordingly. Additionally, GRATs can be complex instruments to set up and manage, so it is important to consult with a qualified financial and legal professional before considering a GRAT.