GRATs and Annuities: Passing Growth Tax-Free

Introduction: Estate Planning in the Post-OBBBA Era

After the One Big Beautiful Bill Act (OBBBA) was passed, a lot has changed in estate planning. There is now a permanent $15 million exemption, indexed for inflation, that provides certainty. But what about those with $30M+ estates? You still need advanced strategies, such as a value freeze for Grantor Retained Annuity Trusts (GRATs).

A GRAT can be used to lock in today’s business valuation while diverting future appreciation to heirs. In this guide, we will talk about how to use a zeroed-out GRAT to pass growth onto heirs that is free of staggering gift or estate taxes.

GRATs for Tax-Free Growth

Before we talk about GRAT freezing, let’s recall the basics of GRATs. A GRAT is a Grantor Retained Annuity Trust. Its main purpose is to transfer wealth to beneficiaries while minimizing gift or estate taxes.

GRATs were established in the 1990s, quickly becoming a sort of “loophole” for wealth preservation. In 2026, everyone is wondering if the OBBBA has changed the effectiveness of GRATs.

What is GRAT freezing

First, the business owner (Grantor) puts their shares of the business into an irrevocable trust. The set term is usually 2 to 10 years. Then, the trust will give back a series of annuity payments to the Grantor over the term. At the end of the term, any assets remaining in the trust will be passed onto the beneficiaries (e.g. children) free of gift or estate taxes.

While the shares are within the annuity trust, they are essentially “frozen”. Their value gets locked in. If the business grows faster than the IRS rate, excess appreciation stays inside the trust and will be passed onto your heirs. The inheritance can avoid triggering estate or gift taxes.

As of March 2026, the 4.80% IRS Section 7520 rate could be used for business owners to transfer millions in growth tax-free.

The Zeroed-Out GRAT for Gifts

GRATs can be an effective way to transfer wealth from you, the Grantor, to your children, grandchildren, or other chosen beneficiaries.

GRATs can be structured to be zeroed out, making the taxable gift amount ~0%. It is possible to structure the annuity payments so their present value exactly equals the value of the assets placed in the trust.

Since the Grantor is technically receiving back everything they put in (plus interest), the IRS values the gift to the heirs at $0. Just make sure that the annuity trust is set up properly, otherwise taxes may still be applicable.

How Does a Zeroed Out Trust Work?

The GRAT needs to be properly structured to be zeroed out. If you’re not careful, you may accidentally make the initial funding of the GRAT to be considered a gift for gift tax purposes. To zero out a trust, the grantor would have to accept combined payments that are equal to the entire trust value (including anticipated appreciation). That might sound confusing, because then wouldn’t there be zero excess growth left for the heir?

Actually, assets that appreciate and exceed the 7520 hurdle rate can be left in the trust, and this can be a substantial amount.

An attorney experienced in structuring GRATs should be consulted when establishing your trust.

What Happens If Business Doesn’t Grow?

GRATs are meant to be minimal risk yet still a good reward when compared to other scenarios and strategies. If the business grows, the heirs win big and you can rest assured of the value gained without a heavy tax burden.

Even if the business doesn't end up growing, the assets simply return to the Grantor with no tax penalty or wasted exemption.

Navigating the 2026 IRS Section 7520 Rate

As of March 2026, the IRS Section 7520 rate is 4.80%. This monthly interest rate is considered the benchmark that businesses need to outperform, so it is also known as the hurdle rate. The Section 7520 rate is used for numerous purposes, such as:

• Annuities
• Remainder interests
• Life estates
• Charitable deductions
• Estate and gift taxes

If a family business grows at 12% annually, the 7.20% "Spread" (12% minus 4.80%) is what passes on to the children (heirs) tax-free.

The lower the Section 7520, the better the value for GRAT strategies.

Impact of OBBBA

If your household or family business has been worried about estate or gift taxes, the OBBBA and the new 2026 interest rate could affect your annuities and payout amounts. Years ago, the tax exemption amounts were planned to decrease after 2025, which would have negatively impacted households wanting to pass on ~$7 million or more. Now, the tax exemption amount is set to be $15 million.

Looking forward, it is impossible for anybody to say there will not be more legislative changes. It is always good to stay up to date on major acts and legislation that are being discussed so that you are prepared. Before creating an annuity or other financial strategy, consult with an expert for personalized, up-to-date asssistance.

Strategic Advantages for Business Owners

Retaining Income

Continuous income is a big concern for many business owners. There should be enough to comfortably fund your retirement lifestyle, so the amount required can differ greatly from person to person.

Annuities are a way for business owners to maintain income even after leaving the business in the heir’s hands. The founder continues to receive an income stream (the annuity) while the next generation takes over the equity.

Maintaining Control

GRATs can allow the owner to maintain votes while still planning for succession and retirement. Retaining control of the company and shares during the trust term is an advantage for many business owners.

In addition, every trust has a designated trustee. The Grantor can serve as the Trustee of the GRAT. The Trustee is the one who manages the business interests inside the GRAT during the term. You can also choose to appoint someone else trusted and professional as the Trustee.

To establish a GRAT, you would usually work with an experienced attorney to set up the trust. It’s important to note that GRATs are irrevocable trusts. It is very difficult to alter the structure and terms of a GRAT after it has been established–a court order and/or consent of beneficiaries would be needed. Because of this, it is highly recommended to speak with an attorney and GRAT expert before creating an irrevocable GRAT.

Discounting Opportunities for Valuation

Discounts could help you lower your initial valuation when appraising your business, potentially making it easier to beat the hurdle rate. Discount examples include:

• Lack of marketability discount
• Minority interest discount

Reasonable discounts usually range from 15% to 40%.

Gaining Value

Generally, it is businesses with high growth potential that end up benefiting the most from GRATs. E-commerces and family businesses that are scaling and expect to grow in the next years can gain the most excess growth above the hurdle rate and benefit more from the tax-free growth inheritance of GRATs.

GRAT Risks and How to Mitigate Them

The Survival Requirement

Death of the grantor is always a risk to consider. If the grantor dies during the GRAT term, the assets are pulled back into their taxable estate at their full current value. This could be a problem since it may leave the estate unprepared for such a sudden situation.

If structured correctly, an annuity may sometimes be passed onto the surviving spouse of the deceased Grantor.

Rolling GRATs

High net-worth individuals can consider rolling GRATs. It involves creating a consecutive series of different GRATs, each GRAT only a short term (e.g. 2 years). This lets you lock in the gains quickly while minimizing the risk of your death impacting the GRAT.

Opting for rolling GRATs does have its downsides, since if the rates shift drastically, you may no longer be able to lock in as advantageous a rate. However, it greatly helps business owners who are more worried about their health and mortality, such as those who have health conditions.

Underperformance and Asset Volatility

What happens if the business value drops? Even the "failed" GRAT is generally not considered such a bad thing. The strategy of creating a grantor retained annuity trust isn’t like gambling at a casino; it’s a safe strategy that tries to lock in a good rate and provide gift tax-free growth to heirs. If the business valuation drops and there is no growth gained over the years, it’s generally only the legal fees that get paid. This is because the assets get returned to you if they fail to beat the benchmark.

Other Wealth Transfer Considerations

Charitable Donations

If you want to pass on your wealth to a charity instead, look into itemizing philanthropy as the OBBBA can either help or hinder you depending on your situation. Itemizers have a new floor of 0.5% of the donor’s contribution base before a charitable contribution deduction can be claimed, and this contribution base is typically the adjusted gross income.

IDGTs

IDGTs are Intentionally Defective Grantor Trusts. They allow grantors to remove assets from their estate—however, the Grantor can still technically remain the owner of the assets for income tax purposes. IDGTs can help preserve generational wealth while avoiding massive estate taxes. IDGTs are older than GRATs by decades.

IDGTs are legal but complex. They should only be created with the help of qualified legal counsel.

Implementation: Your 2026 GRAT Checklist

1. Perform a qualified appraisal

A qualified business appraisal should be done first. First, it is important to ensure that your business valuation stands up to OBBBA reporting standards. It must be performed by a qualified appraiser and meet the regulatory standards. Adequate disclosure requirements of the Treasury Regulations should also be met. If your business does not adhere to the regulations, there may be delays, penalties, or even legal action as you act out your ownership transition, succession planning, and more.

2. Structure the annuity

Find an expert to help you with structuring your GRAT. Decide between level payments or a 20% increasing payment structure to backload the growth depending on your goals.

Note that the fees associated with creating a GRAT can be quite expensive. Dissolving a GRAT isn’t exactly something you can simply do, either. It can be time-consuming and costly. Structure the GRAT with care so that you understand how it works.

3. Dealing with tax implications

Even if your GRAT is supposed to pass on growth gift tax free, it is still important to check whether there are any taxes that need to be paid.

For example, S-Corp versus C-Corp status can matter for the income taxes generated by the trust. C-Corps may have to face double taxation. C-Corps also have stricter ownership requirements set by the IRS.

Generally, S-Corps are more advised to establish GRATs, since S-Corp stocks could be eligible for funding a GRAT.

GRATs: Maintaining Your Legacy

Even in 2026, GRAT is still one of the most powerful ways to succession plan for family businesses and mitigate taxes. You can shield a lot of growth over the years from up to a whopping 40% of estate tax.

However, a GRAT is an irrevocable trust that isn’t easy or cheap to establish. Think through what is the best grantor-retained annuity trust structure for you and your heirs to get the optimal results.