Grantor Retained Annuity Trust (GRAT)
You transfer assets to an irrevocable trust and take back a fixed annuity for a term of years. If the asset outgrows the IRS's assumed rate of return, the excess passes to your beneficiaries gift-tax-free.
A is an estate-freeze technique. You transfer assets you expect to appreciate into an irrevocable trust, and the trust pays you an annual annuity for a set term (often 2-10 years). At the end of the term, whatever is left in the trust passes to your named beneficiaries without further gift tax.
The math: the gift to the trust is valued by subtracting the present value of the annuity stream (using the § 7520 rate) from the trust's initial value. A "zeroed-out" GRAT is structured so the annuity equals the trust's value — making the gift worth zero. If the trust's actual investment return exceeds the § 7520 rate, the excess passes tax-free at the term's end.
Risk: if you die during the term, the entire trust is pulled back into your estate. So pick a term you are very likely to survive.
Use case: you hold a pre-IPO stock position or other asset with high expected appreciation, and you want to transfer the appreciation out of your estate without using gift-tax exemption.
Tagged 🔴 for the same reasons as any complex irrevocable trust — specific statutory requirements, substantial tax stakes, no undo.
State-specific notes
GRATs are federal-tax creatures, governed by IRC § 2702 and § 7520. State estate law provides the trust vessel.
GRATs are a federal-tax-driven strategy (IRC § 2702) and Alabama imposes no state-level estate or gift tax, so there is no Alabama-specific transfer-tax savings overlay. Trust administration follows the Alabama Uniform Trust Code (Ala. Code § 19-3B-101 et seq.). Alabama's 360-year trust duration under Ala. Code § 35-4A-5(9) is generally irrelevant to GRATs, which are short-term by design.
References
Prepare your attorney-intake packet
This strategy requires licensed counsel to draft. Use the builder to capture your facts, intent, and questions in an attorney-ready packet — you'll hand it to the lawyer who actually drafts the trust or agreement. This is not a legal instrument and does not create an attorney-client relationship.