Every time a billionaire makes the news for passing wealth to heirs tax-efficiently, the tool at the center of the story is usually one of two things. A GRAT or a dynasty trust. This post is about the first one, because the GRAT is the one most founders with a concentrated stock position or a pre-IPO company should have on the table before the liquidity event happens — and most of them have never heard the letters in sequence.
GRAT stands for Grantor Retained Annuity Trust. The words are technical but the concept is simple. You put an asset into an irrevocable trust. The trust pays you back over a fixed number of years in the form of an annuity. At the end of the term, whatever is left in the trust — any appreciation above the annuity payments plus an IRS-assumed interest rate — passes to your children (or whomever you named as beneficiaries) free of gift tax and estate tax.
Read that again, because the sentence contains the entire game. The trust pays you back the value you put in, plus a small interest rate set by the IRS (the "7520 rate"), and the excess appreciation goes to your kids outside your estate. If the asset grows faster than the IRS hurdle rate, your heirs get the difference and the IRS gets nothing.
The Walton Family Story
The most famous GRAT case study is the Walton family — the heirs to Walmart. According to Bloomberg's reporting on leaked family documents, Walton family trusts used sequential GRATs over decades to move an estimated several billion dollars of Walmart stock appreciation to the next generation without paying estate or gift tax on the growth.
The mechanic was simple. Put Walmart stock into a two-year GRAT. The stock pays dividends and appreciates. The annuity pays the grantor back the initial value plus the 7520 rate. Whatever is left over — all that juicy Walmart appreciation — goes to the heirs' trust. Roll the annuity payments into a new GRAT. Repeat. Every successful two-year window moves wealth out of the estate permanently.
Mark Zuckerberg reportedly set up GRATs holding pre-IPO Facebook stock at a valuation of around $9.6 billion, and by the time Facebook went public the stock was worth many multiples of that — moving an enormous amount of appreciation to his heirs outside his taxable estate. This is well-documented in securities filings.
Why The 7520 Rate Matters
The secret sauce of the GRAT is the 7520 rate. That's the IRS's assumed interest rate for valuing split-interest trusts, set monthly and based on mid-term Treasury rates. When the 7520 rate is low, the "hurdle" your asset needs to clear to generate appreciation for heirs is low. When the 7520 rate is high, the hurdle is higher and the GRAT has to do more work.
Between 2012 and 2022, the 7520 rate was under 3% for most of the decade, sometimes under 2%. That is a gift. If you could find any asset growing faster than 2% per year — which included basically the entire S&P 500, most real estate, all founder equity, and any growth-stage startup — the GRAT was an almost frictionless wealth transfer vehicle. Rates have moved up since then, making the hurdle harder but not impossible.
The point is this. The GRAT is always available. The rate environment just changes how easy or hard it is. When rates are low, you use GRATs aggressively. When rates are higher, you pick assets with more upside relative to the hurdle. Concentrated stock that you genuinely believe will outperform bonds over the next two to five years is a great GRAT asset in any rate environment.
The Zeroed-Out GRAT (The Version Most People Should Know)
Most GRATs set up by sophisticated families are structured as "zeroed-out" GRATs. The idea is that the annuity payments back to the grantor are calculated to equal the value of the contribution plus the 7520 interest rate. On paper, the IRS sees a transfer of zero value. If the trust assets appreciate faster than the 7520 rate, the excess goes to heirs. If the assets don't appreciate — if they stagnate or lose value — the annuity just pays the grantor back and nothing passes to heirs. It is a heads-I-win, tails-I-don't-lose structure, with the only cost being the legal fees to set up the trust.
This is the version most founders should look at. You put your concentrated position into a two-year GRAT before a liquidity event. If the liquidity event happens during the term, the appreciation moves to your heirs outside your estate. If the liquidity event doesn't happen, you get the stock back and you try again with a new GRAT. The downside is trust admin costs. The upside is potentially millions of dollars passing to the next generation estate-tax-free.
A zeroed-out GRAT is the closest thing in the estate planning world to a free option. You either hit the upside or you end up where you started. The only cost is the fee.
The Rolling GRAT Strategy
The bigger move that the Waltons and others have used is the rolling GRAT. Instead of one big GRAT, you do a series of short-term (often two-year) GRATs in sequence. Each one captures whatever appreciation happens during its window. If one has a bad two years, the grantor just gets the assets back. If another has a great two years, the heirs capture the windfall. Over a 20- or 30-year period, the rolling GRAT strategy captures most of the upside across all market cycles and moves it out of the estate permanently.
The downside of the rolling GRAT is administrative — you are setting up and unwinding trusts every couple of years, which means legal fees, accounting, and valuations. For a family with tens of millions in a concentrated position, the fees are trivial compared to the savings. For a family with a few hundred thousand, the juice is not worth the squeeze.
When A Regular Founder Should Use A GRAT
Here is my view, based on sitting through these conversations with advisors and seeing founders use them in real life. A GRAT makes sense when three things are true:
- You have a concentrated position — founder stock, pre-IPO secondary, or a single business interest — with significant upside expected in the next two to ten years
- You have already used up (or are about to use up) your lifetime gift/estate tax exemption, or you expect to exceed it based on the upside of the position
- You can afford the legal and administrative costs of setting up and administering the trust — typically $10,000 to $30,000 for a simple GRAT and more for ongoing rolling strategies
If all three are true, the GRAT is not an option for you — it is malpractice for your attorney to not at least walk you through it. If you don't have a concentrated position or you are nowhere near the exemption threshold, the GRAT probably isn't worth the cost. But for the founder who holds 20% of a company that is about to triple in value, the GRAT should be on the table before the event happens.
The "I Die During The Term" Risk
Here's the one big risk with a GRAT. If the grantor dies during the term of the trust, the assets in the GRAT get pulled back into the taxable estate as if the GRAT had never existed. All the planning was for nothing. This is why GRATs usually use short terms — two to three years — so the mortality risk is low. For a healthy 50-year-old founder, a two-year GRAT is almost no risk at all. For an older or ill grantor, the term matters a lot more and sometimes a GRAT is the wrong tool entirely.
The Challenge
If you have a concentrated stock position right now — founder shares, pre-IPO secondary, a single business interest you expect to sell — what happens to it when you are gone? Is it sitting in your taxable estate with 40% going to the federal government above the exemption? Is it already appreciating past the point where a GRAT would still be useful? Call an estate attorney this month. Not your general corporate lawyer — an actual estate planning specialist. Ask them about a zeroed-out two-year GRAT. If the numbers work, the conversation is free. If they don't, you learned something. Either way, you're not sleepwalking past one of the few legal tools that actually moves wealth across generations without bleeding to the IRS.
For the other half of the estate planning conversation — trusts that operate on 100-year timeframes — see QPRTs, dynasty trusts, and 100-year windows.
Further Reading
- IRS — Estate Tax Overview
- American Bar Association — Real Property, Trust and Estate Law Section
- National Association of Estate Planners & Councils