Short answer: A grantor retained annuity trust (GRAT) is an irrevocable trust. You transfer assets to it, often an interest in your company, and keep the right to fixed annual payments for a set number of years. When the term ends, whatever is left passes to your family or to a trust for them. What is left is the growth above an interest rate the IRS sets. The taxable gift is measured when you fund the trust and can be set small, so a GRAT tends to make sense only for assets expected to grow quickly.
If you own a growing Florida LLC or corporation, you may have heard a GRAT described as a way to “move the growth, not the business.” Below, we walk through how a GRAT works, the federal rules it has to follow, what happens if you die during the term, and the Florida issues owners tend to miss. If you are new to irrevocable trusts, our article on when an irrevocable trust makes sense covers the basics.
How a GRAT works, step by step
- You sign the trust and transfer assets to it. For a business owner, that is often a minority interest in an LLC or shares in a closely held corporation.
- The trust pays you a fixed annuity. Payments must be made at least once a year for the term of the trust (Treas. Reg. § 25.2702-3(b)).
- The gift is measured at the start. The taxable gift is the value of what you transferred minus the value of the annuity you kept. The annuity is valued using the IRS § 7520 interest rate (IRC § 2702(a)(2)(B)).
- At the end of the term, the remainder passes on. Whatever is left after the last payment goes to the beneficiaries you named, such as your children or a trust for them.
The “hurdle rate”
The § 7520 rate is an interest rate the IRS publishes every month. When a GRAT is valued, the IRS assumes the trust assets will earn that rate. In practice it works as a hurdle. If the assets grow faster than the rate, the extra growth stays in the trust and passes to your family at the end of the term. If they grow more slowly, the annuity payments use up the trust and little or nothing passes on.
As of this writing, the IRS lists a § 7520 rate of 5.6% for October 2026 and 6.2% for November 2026 (IRS, Section 7520 Interest Rates). The rate changes monthly, and the rate that applies is the one for the month the GRAT is funded. We do not predict where rates are headed.
An illustration, not a projection. Suppose an owner transfers an LLC interest valued at $1,000,000 to a GRAT, with annuity payments set so the value of the retained annuity is close to the full $1,000,000. The reported gift would then be small. If the LLC interest grows faster than the hurdle rate during the term, the amount left after the final payment passes to the owner’s children. If it doesn’t, the payments return the value to the owner and the children receive little or nothing. These round numbers are made up to show the mechanics. They are not a prediction of any outcome, and actual figures depend on an appraisal, the § 7520 rate and how the trust is drafted.
GRAT vs. an outright gift
An outright gift of company stock uses your federal gift and estate tax exclusion on the full value of what you give today. For 2026, the basic exclusion amount is $15,000,000 (IRS, What’s New: Estate and Gift Tax, citing P.L. 119-21).
A GRAT is different. It aims to move only the growth above the hurdle rate, while you get the original value back through the annuity. That can matter for an owner who wants to keep exclusion available.
One trade-off applies to both: assets you give away during life generally keep your income-tax basis. Our article on estate tax planning and capital gains basis explains why that matters.
The rules that make a GRAT “qualified”
Federal law values the annuity you keep under § 7520 only if it is a “qualified interest.” The trust document has to meet specific requirements, including these:
- Fixed payments. The annuity must be a stated dollar amount or a fixed percentage of the initial value of what you transferred. Each year’s payment can be no more than 120% of the prior year’s payment (Treas. Reg. § 25.2702-3(b)(1)(ii)).
- No additional contributions. The trust must prohibit adding more property later (§ 25.2702-3(b)(5)).
- No prepayment. The trust must prohibit commutation, meaning paying off your annuity early (§ 25.2702-3(d)(5)).
- No notes. For trusts created on or after September 20, 1999, the trustee cannot pay the annuity with a note or similar debt instrument (§ 25.2702-3(d)(6)).
- A fixed term. The term must be fixed and ascertainable when the trust is created (§ 25.2702-3(d)(4)).
Why this matters: if the retained annuity is not a qualified interest, it is valued at zero (IRC § 2702(a)(2)(A)). In that case, the full value you transferred is treated as a gift. These requirements are one reason a GRAT should be drafted and administered with counsel, not assembled from a form.
What happens if you die during the term
This is the main risk. If you die before the GRAT term ends, the federal estate tax regulations bring back into your gross estate the portion of the trust needed to generate your annuity payment as income at the § 7520 rate, without using principal, up to the full value of the trust. The regulation names GRATs specifically (Treas. Reg. § 20.2036-1(c)(2)). Depending on the numbers, that can be much or all of the trust.
In plain terms, the estate tax benefit the GRAT was meant to produce is lost, in whole or in part. The family generally ends up close to where it would have been without the GRAT, apart from the costs of setting it up and running it.
That is why the length of the term is chosen partly with this risk in mind. The right term depends on your age, health, goals and the asset involved, which is a conversation to have with your attorney.
Florida points owners miss
No Florida estate tax
Florida’s estate tax statute imposes a tax equal to the federal credit for state death taxes (Fla. Stat. § 198.02). Florida does not currently impose a separate estate tax because the federal credit it depends on is no longer available.
A GRAT is also not a probate-avoidance tool. It is a gift and estate tax planning device.
Putting an LLC interest in a GRAT
Under Florida’s LLC act, a transfer of a transferable interest gives the transferee the right to receive distributions, but not the right to take part in managing the company (Fla. Stat. § 605.0502(1), (2)). A transfer that violates a transfer restriction in the operating agreement is ineffective as to a person who knows or has notice of the restriction (§ 605.0502(6)).
For corporations, the articles, bylaws or a shareholder agreement can restrict share transfers, including rights of first offer and approval requirements (Fla. Stat. § 607.0627).
Before funding a GRAT with company interests, read the operating agreement or shareholder agreement. A buy-sell provision or consent requirement may need to be addressed first. Our articles on LLC operating agreements and buyouts and ownership vs. control in a Florida business go deeper.
Married owners and the elective share
Florida’s elective share counts more than the probate estate. Property you transferred while keeping a right to income can be pulled into the “elective estate” if you die while still holding that right (that is, during the GRAT term). The statute expressly treats a right to payments from an annuity trust as a right to income for this purpose (Fla. Stat. § 732.2035(6)(a)). Transfers made with your spouse’s written consent are excluded (§ 732.2045(1)(c)). The same statute says that consenting to split-gift treatment for federal gift tax purposes is not written consent to the transfer.
If you are married, this is worth raising early. Our article on the Florida elective share explains the basics.
Using a GRAT before selling a business
Valuation is central when a sale is on the horizon. The annuity is often set as a percentage of the value of what you transferred “as finally determined for federal tax purposes” (Treas. Reg. § 25.2702-3(b)(1)(ii)(B)), so a credible appraisal matters.
Timing matters too. If a deal is already under discussion, talk to counsel before a letter of intent or purchase agreement is signed. Your CPA and appraiser should be part of the conversation from the start.
For the bigger picture, see our articles on business succession planning for Florida owners and whether children should inherit a family business equally.
When a GRAT is usually the wrong tool
- Your estate is well under the federal exclusion, and a basis step-up at death matters more.
- The asset is not expected to outgrow the § 7520 rate.
- You cannot afford to give up the future growth of the asset.
- Your life expectancy is short, which raises the death-during-term risk.
- Your operating agreement or shareholder agreement blocks the transfer.
In those cases, a simpler plan may fit better. Our advanced estate planning page and our article on control and flexibility in advanced trusts describe other approaches.
Who reports what
A transfer to a GRAT is a gift reported on Form 709, and the IRS Instructions for Form 709 discuss the § 2702 valuation rules; your CPA is the key partner on the return.
Frequently asked questions
What is a grantor retained annuity trust (GRAT)? It is an irrevocable trust that pays you fixed annual amounts for a set term. Whatever is left at the end of the term passes to your beneficiaries.
How is the gift to a GRAT valued? The gift equals the value you transfer minus the value of the annuity you keep, with the annuity valued under § 7520 (IRC § 2702(a)(2)(B)). If the annuity does not meet the qualified-interest rules, it is valued at zero and the full transfer is treated as a gift (IRC § 2702(a)(2)(A)).
What happens if I die before the GRAT term ends? The portion of the trust needed to generate your annuity payment as income at the § 7520 rate, without using principal, up to the full value of the trust, is included in your gross estate (Treas. Reg. § 20.2036-1(c)(2)). That can be much or all of the trust, and the intended estate tax benefit is lost in whole or in part.
Can I put my Florida LLC interest in a GRAT? Often, yes, but check the operating agreement first. A transfer that violates a transfer restriction is ineffective as to a person with knowledge or notice of the restriction (Fla. Stat. § 605.0502(6)), and the transferee receives distribution rights, not management rights (§ 605.0502(1), (2)).
Does a GRAT still make sense with a $15 million exclusion in 2026? It depends on the size of your estate and how fast the asset is expected to grow. The 2026 basic exclusion is $15,000,000 (IRS). For an estate well under that amount, a basis step-up at death may matter more. For a larger or fast-growing estate, a GRAT may still be worth discussing.
Does my spouse have rights in assets I put in a GRAT? Possibly. Florida’s elective share can reach property you transferred while keeping a right to annuity-trust payments (Fla. Stat. § 732.2035(6)(a)) if you die while still holding that right (that is, during the GRAT term), unless your spouse gave written consent to the transfer (§ 732.2045(1)(c)).
Talk with us about your business and your estate plan
If you own a growing Florida business and are weighing how to pass on future growth, a consultation can help you see whether a GRAT fits, or whether something simpler does. We work with owners and their CPAs on estate planning and estate and succession planning across Central Florida.
The Law Offices of Brian Giaquinto serves clients throughout Central Florida from its Daytona Beach office and meets Brevard County clients by appointment at the Suntree Business Center in Melbourne. Schedule a free consultation: call (386) 244-9633 or visit our contact page. You can find more articles in our Legal Insights library.
This article is for general educational purposes and is not legal advice. Reading it does not create an attorney-client relationship. Statutes and case law change; consult an attorney about your specific situation.