GRAT Attorney in Austin, TX: Grantor Retained Annuity Trusts

Grantor Retained Annuity Trusts (GRATs) for Business Owners and Investors

A grantor retained annuity trust (GRAT) is a way to give your children the future growth of an asset, such as a business, private company stock or a concentrated stock position, while using little or none of your lifetime exemption. It is especially useful for business owners who expect a value increase or a sale.

Reviewed by Turner Henington, attorney and former KPMG tax accountant, Texas Bar No. 24148206 · Updated November 2026

How a Grantor Retained Annuity Trust Works

• Zeroed-out GRATs. The annuity can be set so the gift is close to zero, so little or no exemption is used (Walton v. Commissioner, 115 T.C. 589 (2000)).
• Annuity payments. Payments can be made in cash or in kind with the trust’s assets, and can increase by up to 20% per year (Treas. Reg. § 25.2702-3(b)(1)(ii)), which leaves more of the early growth in the trust.
• Income tax. A GRAT is a grantor trust, so you pay the income tax and there is no gain when the trust pays your annuity with appreciated assets.
• “Heads you win, tails you tie.” If the assets underperform the § 7520 rate, the trust simply pays them back to you, and you have lost little beyond the legal costs.

Rolling GRATs

Many clients use a series of short-term GRATs, often two years each, and roll each annuity payment into a new GRAT. Short terms capture growth in volatile assets and reduce the risk that the grantor dies during the term.

Risks and Limits

• Surviving the term. If you die before the term ends, some or all of the trust is included in your estate (26 U.S.C. § 2036).
• Not for grandchildren. GST exemption cannot be allocated to a GRAT until the term ends (26 U.S.C. § 2642), so GRATs usually benefit children or trusts for them, not dynasty trusts directly.
• Valuation. Hard-to-value assets need a qualified appraisal, and the annuity should be defined as a percentage of the initial value so it adjusts if the IRS changes the value.

Grantor Retained Annuity Trusts and Family LLCs

Business owners and real estate investors often hold assets in a family limited liability company or partnership and place non-controlling interests in a GRAT or other trust. Because a minority interest cannot control the company or be easily sold, a qualified appraiser may value it below its share of the underlying assets. The IRS challenges family entities where the parents keep control of the assets or keep using them personally (see Estate of Powell v. Commissioner, 148 T.C. 392 (2017)), so the entity needs a real business purpose and must be run like a business.

GRAT or Another Strategy?

GRATs work best for assets with high expected growth and for clients who want to use little exemption. Clients with more exemption to use, or who want to benefit grandchildren, may prefer a gift or sale to a SLAT or dynasty trust. We compare the options with projections before recommending one.

How We Help

We draft the grantor retained annuity trust and any family LLC agreement, coordinate the appraisal, set up the annuity schedule, and work with your CPA on the gift tax return and the annual payments. See the estate tax planning overview for related strategies.

Why Work With Us

• Tax background. Turner Henington is a former KPMG tax accountant, so we design trusts with both the estate tax and your family’s income tax in mind.
• We work with your CPA and advisor. Marital and bypass trust decisions often happen after a death, on the estate tax return, so we coordinate with the people who prepare it.
• Flat-fee quotes. After a free consultation, you get a written flat-fee quote before any work starts.
• We also handle the first death. Funding these trusts and making the elections is part of settling the estate, and we handle both the planning and the administration.

Talk to an Estate Tax Planning Attorney

Call (512) 737-8404, book a free consultation, or send us a message below.

What Our Clients Say

Grantor Retained Annuity Trust (GRAT) FAQ

What happens if I die during the GRAT term?

Some or all of the GRAT assets are included in your estate, roughly putting you back where you would have been without the GRAT. That is why many clients use short-term rolling GRATs.

What assets work best in a GRAT?

Assets expected to grow faster than the IRS § 7520 rate, such as interests in a growing business, pre-IPO or pre-sale company stock, or a concentrated stock position.

Does a GRAT use my lifetime exemption?

A zeroed-out GRAT uses little or none, because the value of the annuity you keep equals almost the full value of the assets you contribute.

Other Estate Tax Planning Tools

• Estate tax planning in Austin: overview
• Bypass (credit shelter) trust
• Marital trust
• QTIP trust
• Reverse QTIP election
• Spousal lifetime access trust (SLAT)
• Irrevocable life insurance trust (ILIT)
• Dynasty trust and GST planning
• Disclaimer trust
• Charitable remainder and lead trusts
• Portability: keeping a deceased spouse’s unused exemption
• Lifetime gifting in Texas

This page is general information, not tax or legal advice for your situation. Reading it does not create an attorney-client relationship.