Grantor Retained Annuity Trusts (GRATs) in Florida
26 U.S.C. §§ 2702, 7520, 2036, 2642(f); Treas. Reg. §§ 25.2702-3, 20.2036-1(c)(2)
A grantor retained annuity trust (GRAT) holds an asset for a fixed term and pays you a set annuity each year. Growth above the IRS § 7520 rate passes to your children at little or no gift tax cost. If you die during the term, much or all of the trust is included in your estate.
What it is
A GRAT is a gift of the future. You transfer an asset to an irrevocable trust and keep the right to receive a fixed annuity for a set number of years. When the term ends, whatever remains goes to the remainder beneficiaries, usually your children or a trust for them. The taxable gift is only the value of that remainder, measured on the day you fund the trust.
Federal law controls how the gift is valued. When you transfer property in trust for a family member and keep an interest, your retained interest counts as zero unless it is a "qualified interest" (26 U.S.C. § 2702(a)(2)(A)). A right to receive fixed amounts payable at least annually is a qualified interest (26 U.S.C. § 2702(b)(1)), and it is valued using the IRS tables and interest rate under § 7520 (26 U.S.C. § 2702(a)(2)(B)). The gift equals the value of the property minus the value of your annuity. Many GRATs are designed so the annuity is worth nearly all of the property, leaving a very small taxable gift.
The § 7520 rate is the hurdle the asset has to beat. It equals 120 percent of the federal midterm rate for the month of the transfer, rounded to the nearest two-tenths of one percent (26 U.S.C. § 7520(a)(2)). The IRS publishes the rate monthly. If the trust's assets earn more than that rate over the term, the excess stays in the trust and passes to your beneficiaries without using additional exemption. If they earn less, the annuity payments return the assets to you and little or nothing passes. In that case, you are largely back where you started, apart from the costs of setting up the trust.
Treasury regulations set strict drafting rules. The annuity may increase from year to year by no more than 120 percent of the prior year's amount, annuity payments based on the trust's anniversary must be made within 105 days after that anniversary, the trust must prohibit additional contributions, the term must be fixed when the trust is created, and no one other than you may receive distributions during the term (Treas. Reg. § 25.2702-3(b)(1)(ii), (b)(4), (b)(5), (d)(3), (d)(4)). A GRAT that misses these requirements does not get the favorable valuation.
Because the annuity can be paid from trust income to you, a GRAT is generally a grantor trust for income tax purposes (26 U.S.C. § 677(a)(1)). You report the trust's income on your own return during the term.
GRAT Rules at a Glance
These rules come from the Internal Revenue Code and the Treasury regulations. The § 7520 rate changes monthly, so it is confirmed on the IRS website for the month the GRAT is funded.
| Item | 2026 Figure | Notes |
|---|---|---|
| Hurdle rate | IRS § 7520 rate | 120% of the federal midterm rate for the month of transfer, rounded to the nearest 0.2% (26 U.S.C. § 7520(a)(2)). |
| Annuity increase limit | 120% per year | Each year's annuity may not exceed 120% of the prior year's (Treas. Reg. § 25.2702-3(b)(1)(ii)(A)). |
| Annuity payment deadline | 105 days | For payments based on the trust's anniversary date (Treas. Reg. § 25.2702-3(b)(4)). |
| Additional contributions | Prohibited | The trust must prohibit them (Treas. Reg. § 25.2702-3(b)(5)). |
| 2026 basic exclusion amount | $15,000,000 per person | 26 U.S.C. § 2010(c)(3). A well-designed GRAT uses little of it. |
This page does not quote a current § 7520 rate. The rate for any month is published by the IRS and is confirmed when the GRAT is funded.
When a GRAT Fits
A GRAT tends to work well when:
- Your estate is near or above the federal exemption ($15 million per person in 2026), or you have already used much of your exemption on earlier gifts.
- You own an asset you expect to grow quickly, such as stock in a closely held business before a sale, a concentrated public stock position, or real estate in a rising market.
- You want to move growth to your children without using much exemption.
- You are in good health and expect to outlive the GRAT term. Shorter terms reduce the mortality risk.
- You are comfortable reporting the trust's income on your own return during the term.
A GRAT is not a good vehicle for grandchildren. GST exemption cannot be allocated to a GRAT until the term ends, as explained below and on our generation-skipping trust page.
GRAT vs. a SLAT
| Aspect | Grantor Retained Annuity Trusts (GRATs) in Florida | Spousal Lifetime Access Trust (SLAT) |
|---|---|---|
| Exemption used | Often very little; the gift is only the value of the remainder | The full value of the gift |
| Who receives payments during the term | You receive the fixed annuity | Your spouse may receive distributions |
| If you die early | Much or all of the trust is included in your estate (§ 2036) | The gift is generally complete and outside your estate if properly drafted |
| What passes to the family | Only growth above the § 7520 rate | The full gift plus all future growth |
| GST exemption | Cannot be allocated until the term ends (§ 2642(f)) | Generally can be allocated on the gift tax return |
| Must you be married? | No | Yes |
The Mortality Risk: Dying During the Term
A GRAT only removes value from your estate if you outlive the term. The gross estate includes property you transferred while keeping the right to income from it "for any period which does not in fact end before his death" (26 U.S.C. § 2036(a)). If you die during the GRAT term, Treasury regulations include the portion of the trust needed to generate your annuity, computed using the § 7520 rate, capped at the trust's value on the date of death (Treas. Reg. § 20.2036-1(c)(2)(i)). In practice, that is often all or most of the trust.
If that happens, you are generally no worse off for estate tax purposes than if you had never created the GRAT. The planning benefit is simply lost. That is why many plans use shorter terms, sometimes in a series of GRATs, rather than one long one.
Why GRATs and Grandchildren Do Not Mix
GST exemption cannot be allocated to property that would be included in your estate if you died immediately after the transfer, until that period (the estate tax inclusion period) ends (26 U.S.C. § 2642(f)(1)). A GRAT is in that period for its whole term. Exemption allocated at the end of the term is measured against the trust's value at that time (26 U.S.C. § 2642(f)(2)), so the growth the GRAT was designed to capture is already counted. Families who want to benefit grandchildren usually direct the GRAT remainder to children or to a trust that is not intended to be GST-exempt, and use other techniques for the generation-skipping portion.
How a GRAT Is Set Up
A GRAT is a modeling exercise first. The term, the annuity, and the asset are chosen together.
- Step 1: Identify the asset and obtain a qualified appraisal if it is not publicly traded.
- Step 2: Model the GRAT using the § 7520 rate for the month of funding, choosing a term and annuity that balance the mortality risk against the expected growth.
- Step 3: Draft the trust to meet every requirement of Treas. Reg. § 25.2702-3, including the payment schedule and the prohibitions on additional contributions and commutation.
- Step 4: Transfer the asset into the trust and document the date and value.
- Step 5: File a gift tax return (Form 709) reporting the transfer for the year of funding.
- Step 6: Make each annuity payment on time and keep records. Late or missed payments can undermine the trust.
- Step 7: At the end of the term, distribute the remainder as the trust directs and decide whether to start a new GRAT.
Why work with an attorney
GRATs are technical. The favorable valuation depends on the trust document meeting every requirement of 26 U.S.C. § 2702 and Treas. Reg. § 25.2702-3, and on the trustee making every annuity payment on schedule for the full term. The choice of asset, term, and annuity requires modeling with your CPA and financial advisor. Yergey & Yergey, P.A. has practiced in Orlando since 1928, and David A. Yergey III holds an LL.M. in Taxation from the University of Alabama School of Law. We draft and coordinate GRATs as part of a broader estate tax plan and with your existing irrevocable trust structures.
Frequently Asked Questions
What is a grantor retained annuity trust?
A grantor retained annuity trust (GRAT) is an irrevocable trust that pays you a fixed annuity for a set term. At the end of the term, what remains passes to your beneficiaries. Under 26 U.S.C. § 2702, the taxable gift is the value of the property minus the value of your annuity, computed using the IRS § 7520 rate. Growth above that rate passes to your family without additional gift tax.
What happens if I die before the GRAT term ends?
Much or all of the trust is included in your gross estate. Under 26 U.S.C. § 2036(a) and Treas. Reg. § 20.2036-1(c)(2), the included amount is the portion of the trust needed to produce your annuity at the § 7520 rate, capped at the trust's value at death. You are generally no worse off than if you had not created the GRAT, but the planning benefit is lost. Shorter terms reduce this risk.
What is the § 7520 rate, and why does it matter for a GRAT?
The § 7520 rate is the interest rate the IRS uses to value annuities and remainder interests. It equals 120 percent of the federal midterm rate for the month of the transfer, rounded to the nearest 0.2 percent (26 U.S.C. § 7520(a)(2)). It is the GRAT's hurdle: only growth above the rate passes to your beneficiaries free of additional gift tax. The IRS publishes a new rate each month.
What assets are used in a GRAT?
Assets expected to grow faster than the § 7520 rate during the term. Common choices are closely held business interests before an expected sale, concentrated stock positions, and real estate in a rising market. Assets that are hard to value need a qualified appraisal. Assets that produce steady, modest returns are less useful, because the annuity under 26 U.S.C. § 2702(b)(1) can return nearly everything to you.
Can a GRAT benefit my grandchildren?
Not efficiently. GST exemption cannot be allocated to a GRAT until its term ends, because the trust would be included in your estate if you died during the term (26 U.S.C. § 2642(f)). At that point, exemption is measured against the trust's value, including the growth the GRAT produced. Most families direct a GRAT remainder to children and use other techniques for grandchildren.
Do I have to file a gift tax return for a GRAT?
Yes. The remainder of a GRAT is a gift of a future interest, which does not qualify for the annual exclusion (26 U.S.C. § 2503(b)(1)), and a return is required for any gift that is not excluded (26 U.S.C. § 6019). Form 709 is generally due April 15 of the year after the gift (26 U.S.C. § 6075(b)(1)). Reporting the transfer fully also documents the valuation used to set the annuity.
The information on this page is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Florida law changes. Consult a licensed Florida attorney for guidance specific to your matter.
Thinking about a GRAT?
A GRAT should be modeled against the asset and the current § 7520 rate before it is signed. Call (407) 843-0430 or schedule a consultation with our Orlando estate planning attorneys to review whether a GRAT fits your estate plan.
Or text PROBATE to (407) 906-9507 for a faster response.
Yergey & Yergey, P.A. | 910 N. Fern Creek Avenue, Orlando, FL 32803
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